The Collapse of Greensill Capital Explained
Hello and welcome back to patrick boyle on finance i have a really good story for you guys today it’s a little bit complicated but it’s well worth understanding today’s story includes a bunch of overlapping scandals mistakes and frauds it’s tied to businesses on almost every continent but the whole lot revolves around a controversial australian billionaire named
Lex greensell let’s see if we can unwrap this story because it’s a big one and it’s getting bigger there are echoes of the subprime mortgage crisis in the green cell story with really bad loans being passed off as good to an unsuspecting end customer we’ve seen large financial institutions collapse in the past but these collapses have usually been after a big fall
In financial markets there’s that famous warren buffett quote that only when the tide goes out do you see who’s been swimming naked some of you might want to avert your eyes for the rest of the story as while the tide has not yet gone out you’re going to see a lot of naked swimmers in here this meltdown is quite different to the ones from the past as i can’t
Really think of another example of a collapse like this occurring within a percent or two of all time market highs i don’t think the story is very well explained in the press right now largely just due to its complexity so hopefully you’ll find this video useful at the very center of all of these issues we have green sill capital an australian company mostly
Based out of london with lots of embarrassing ties to the british government they’re not really regulated by the fca the british financial regulator other than for anti-money laundering next up we have sanjiv gupta a bankrupt british indian commodities trader and industrialist and his firm gfg alliance gfg stands for gupta family groups it’s a family business
Then there’s catera a silicon valley construction technology company whatever construction technology is and bluestone resources a west virginia coal mining company owned by the west virginia state governor and managed by his son on top of this we have a few insurance companies including insurance australia group and tokyo marine because this story relates to
Investments in companies that are not really technology companies but claim to be like katera and green cell softbank is of course involved and a financial scandal wouldn’t be a financial scandal without credit suites so they’re swimming in here too finally we have former british prime minister david cameron who lobbied for greenville and because of the time we
Live in there’s a bid over half a billion dollars worth of covered large business interruption loans backed by the british government there’s been remarkably little coverage of this story and i think the reason for this relates to its complexity in addition it’s not yet obvious where the losses which will be enormous will sit and this is largely because it hasn’t
Yet been decided upon most of the main characters in this story when they do talk talk about how they will not be the one left holding the bag so i guess we have an undesirable bag in this story too so let’s begin our story with roland hartley urcard i know he sounds british but he’s actually american a former investment banker who claims to have invented the
Business of supply chain finance he even filed for a patent on this idea in 1998 and surprisingly enough he seems to have received one i’ll put a link to the patent in the description it’s not clear to me that he actually invented anything he seems to have taken the centuries-old business of factoring added in the terms just-in-time manufacturing and database
And renamed its supply chain financing and that i guess can then be patented so what is factoring or supply chain financing well typically businesses might purchase supplies for their manufacturing on net 30 or net 90 credit terms meaning that they pay for these goods around 30 or 90 days after they receive them this works for the buyers of goods as they get
Financing from their suppliers but it doesn’t show as debt on their balance sheet ideally they might even be able to sell their finished goods before even paying for these supplies this isn’t as good for suppliers though as often they have to borrow money to finance their customers how supply chain financing works is that a firm like green sale would insert itself
Between buyers and sellers of goods paying the sellers of goods right away but at a discount and then collecting the full invoice amount later from the buyers earning a return on the short-term financing green cell would then package these short-term loans into notes some of which were insured by credit insurers then it would sell them to funds in particular
Those run by credit suisse that would offer the investment to their customers as a fund that provided slightly higher than money market returns it’s not clear what the tech in this fintech company is but they did get capital from softbank and based upon my reading of ercart’s patent it would appear that the invoices were stored on a database so i guess if we
Work as a tech company so is green cell now green sill has been involved in some controversies in the past they were involved in the nmc health scandal in 2019 where the abu dhabi based private hospital company was found to be hiding 2.7 billion dollars worth of debt they were involved in some confusing financing deals like in 2016 when they bought up vodafone’s
Payables put them in a fund run by the swiss asset manager gam that vodafone then invested in why didn’t vodafone just use the money they invested in bonds backed by their own payables to simply pay down their payables you might ask well it looked good in vodafone’s accounts to have a lot of cash and to be good at managing their payables by stretching them out as
Long as possible greencill was also involved in the 2018 collapse of tim hayward’s fund at swiss asset manager gam which was all over the news headlines at the time tim hayward overloaded his fund with green sill paper backed by sanjeev gupta’s gfg alliance at valuations that some considered questionable after hayward’s fund collapsed green cell needed a new
Large-scale source of financing green cell had previously bought a small failing german bank called nord finance bank back in 2014. they renamed it greenfield bank recapitalized it attracted deposits by paying a higher than average interest rate and used it to get letter of credit capacity to support greenfield activities green sill provided billions of dollars
Of financing to sanjiv gupta’s gfg alliance a family-owned web of businesses from metals through to banking which had around 20 billion dollars in revenues much of the funding for gfg’s expansion came through green cell bank the german financial regulator baffin asked greenfield bank back in february to reduce the bank’s exposure to companies linked to gupta and
Began auditing the bank this leads us to the collapse of green cell and the role of insurance companies green sill which was financed by south bank also financed a soft bank portfolio company called catera which is a construction technology company founded by former tesla ceo michael marks katera fabricates buildings offside for final assembly on a construction
Site they possibly use a database too so they are a tech firm katera narrowly avoided financial collapse in december 2020 and were forced to restructure their debts including those owed to green sill greensell said its clients didn’t incur any losses from those defaults as they were insured at the same time softbank put 200 million into ketera and 400 million
Into greenfield greenfield then forgave 435 million worth of katera dead in exchange for five percent ownership in qatari a near bankrupt company it looks like the insurance companies who insured the debt might have possibly taken the hit but it’s not clear on the first of march this year there was a late night emergency sitting of the supreme court of new south
Wales in australia i’ve put a link to the judgment in the description green sill was trying to force insurance australia group to renew 4.6 billion dollars in credit insurance the policy documents required 180 days of notice to terminate and the insurance company was accused of giving only 179 days notice greensell wanted to force renewal of the policy and the
Judge refused to judge the case which might have bankrupted a major australian insurance company he only agreed that it was an arguable case and so that court case is still to be heard this court case led to a chain of events whereby credit suisse funds stopped accepting green cell assurances and baffin the german regulator took over greenfield bank determining
The green cell bank was unable to provide evidence of the existence of receivables it had purchased from sanjeev gupta’s gfg alliance group in addition britain’s state-owned business bank stripped green cell capital of a government guarantee on loans to sanjiv gupta after deciding that it had breached the terms of pandemic lending programs by lending him eight
Times the amount allowed under the program this leaves green sill not the british government on the hook when gfg collapsed okay so we’re about up to date on the story but we need to now work out how big these losses are and who will be taking the hit at this point it looks like one of the insurance companies involved might have taken a hit on that 435 million of
Katera debt and then refused to renew the insurance policy a court in australia will decide whether the policy must be renewed or not but none of the involved insurance companies are saying they took a hit and they’re claiming that one way or another they laid off their risk to reinsurance companies if one of these companies did take a hit they will most likely
Dispute the insurance and try to push the loss back to greenfield softbank credit suisse or the fund investors who will most likely sue as well there’s much more to the story though because the issue is not just the ketera debt i haven’t yet explained how bad the situation is with gfg alliance and i haven’t yet explained what it meant when baffin says that they
Could not find evidence of invoices these companies are not green cells only customers they have lots of other customers too and eventually we’ll have to work out what their loans look like too next we need to discuss a meeting that occurred between james c justice iii the chief executive officer of bluestone a west virginia coal mining company and roland hartley
Urcard the guy who held a patent for supply chain financing and was at the time the vice chairman of greensell roland was greenfill’s main relationship manager with bluestone and in the meeting according to court records roland promised not to leave bluestone holding the bag because he believed in bluestone and the strength of bluestone’s management so what is
The bag and who’s holding it right now bluestone the coal mining group had borrowed 70 million using supply chain finance which we all understand at this point because i explained it earlier but it had also borrowed 780 million which is over 11 times as much against receivables that have not yet been generated by bluestone from prospective buyers which included
Entities that were not and might not ever become customers of bluestone so maybe you could be one of these people bluestone basically came up with a list of people they might hopefully someday sell coal to and the amount of money that they would get from that sale and green silt then made an unsecured loan to them which was passed off as supply chain financing
We’re now getting closer to the central mystery of green sill the reason why somebody must be left holding the bag german regulators had already identified this problem it’s why they seized greenfield bank early this march kpmg had been unable to verify the existence of certain invoices relating to sanjeev gupta’s gfg alliance which was green cell’s largest
Customer and ruled that the advanced receivables on the balance sheet could only be treated as an unsecured loan so it’s probably a good guess that many of the gfg loans were of similar quality to the bluestone loan the credit suite supply chain finance fund which is right now being unwound because of this scandal had about 10 percent of its assets invested
In u.s treasuries so that money is safe it was diversified as to the countries that the assets were from and the industries that they were in but they were not diversified as to the source of these assets which appear to be mostly from green cell the credit suisse funds appear to total to around 10 billion dollars of which they’ve repaid around 3.1 billion to
Investors according to a statement they made last thursday but there’s considerable uncertainty according to credit suite over the rest a large portion of the remainder of the loans was to sanjeev gupta’s gfg alliance which is already defaulted another large part was credit extended to bluestone where the recovery prospects do not look very good if the kind of
Loans green cell was making to their other customers look anything like the loans to bluestone this is not a pretty picture now these credit suisse funds were marketed to customers of credit suisse as being low risk they targeted a return of libor plus one and a half percent and in truth i’m not sure that i’ve ever seen such high-risk assets being packaged with
Such a terrible return it possibly explains why lex green cell owned for private jets the deposits were marketed as being insured by highly rated insurance companies the deposits at green cell bank in germany were supposedly insured too but we don’t know who the insurance company is some of it is possibly the german government though iag insurance australia group
Say that they have no net insurance exposure to trade credit policies including those sold to green sale entities all of those policies they claim were reinsured by tokyo marine a large japanese insurer tokyo marine says that they are not liable and that they stand ready to protect their interests in court as required according to greenself marketing statements
They provided more than 143 billion dollars worth of financing in 2019 to 10 million customers and suppliers it’s impossible right now to know how good or bad those loans are they can’t all be as bad as the bluestone loans hopefully several german municipalities in addition have stated that they put millions of euros into greenfield bank attracted by its lack of
Negative interest rates and some are calling on the federal government to cover any losses that arise so we know that there are big losses but not how big they are we know that there’s a bag but we haven’t yet identified the bag holder this story highlights the complexity of the modern world of finance and the problems associated with lightly regulated shadow
Banks and financial technology firms many of these firms grew when post-financial crisis regulation disincentivized banks from lending much like the now insolvent wire card green sill owns a bank in germany but the parent group is not regulated like a bank they were both classified as fintech companies no one knows the precise amount of bad loans involved credit
Suisse right now is budgeting for one to two billion dollars insurance policies covered at least 4.6 billion dollars in july last year the japanese insurer tokyo marine said that an underwriter had breached exposure limits by writing coverage for more than seven billion dollars i think this story is going to get a lot bigger soon i put links to the source articles
That i used in the description below if you want to read more about this let me know in the comments section if you think i left anything important out and don’t forget to hit the like button and subscribe i’ll see you next week bye
Transcribed from video
The Collapse of Greensill Capital By Patrick BoyleliveBroadcastDetails{isLiveNowfalsestartTimestamp2021-03-23T213551+0000endTimestamp2021-03-23T215615+0000}