Credit Suisse, David Cameron and the Whyalla steelworks: The extraordinary demise of Greensill Capital

THE year 2021 has seen the far from gracious collapse of America’s forty-fifth President (and his infamous Twitter account), the Collingwood Football Club’s brief premiership window (as a one-eyed pie self-deprecating humour is all I have left), and Australian-born Lex Greensill’s $US7 billion supply chain financing firm, Greensill Capital.

While much of the unravelling of Greensill Capital has been confined to corporate boardrooms and the erudite pages of the Australian Financial Review and the Financial Times – it presents a remarkable story involving an investment banking behemoth, a former British Prime Minister, and even a steelworks in rural South Australia.

In a matter of weeks in early March, Greensill Capital lost its $US10b funding facility with Swiss investment bank Credit Suisse, was placed under a criminal investigation by German financial regulator BaFin, was informed that its largest client will no longer pay its bills, and ultimately – filed for insolvency. [1]

To understand just how Greensill orchestrated its spectacular fall from grace, it’s best to start with a closer look at the form of business which the firm was involved in.

What is supply-chain finance?

While it may sound rather complicated, supply-chain finance is a well-established, albeit less glamorous service offered by the major banks. It works through clients who engage the banks to pay invoices (usually to suppliers and associated businesses) on their behalf but at a slight discount. The suppliers tolerate the discount due to the immediate cash flow injection, with the client paying back the full fee to the bank or financing firm at a later date – thus allowing the bank to pocket the difference. [2]

From a broader economic perspective, supply-chain financing maintains the velocity of money and ensures that small businesses in the supply chain are not disadvantaged by waiting for invoices to be fulfilled. The rationale being that immediate cash flows allows these businesses to invest and expand their operations, as well as guaranteeing their confidence and peace of mind.

But while the supplier might be satisfied, there lies an inherent weakness in the business model. The debt – and thus the risk – generated by immediately financing the suppliers on behalf of clients does not simply disappear. Instead, like the fundamental laws of energy, the risk is merely transferred to the firm itself, who flirt dangerously with the prospect of their less reliable clients not fulfilling their debt obligations. [3]

To protect against this risk, and to ensure the steady stream of credit underpinning this model, firms will often engage with two further parties: third-party funders and insurance companies. The funders may include larger investment banks who purchase securitised packages of supplier invoices in a manner that is scarily reminiscent of subprime mortgage securities circa 2007. The role of the insurer is more self-explanatory – there to protect against clients who default on debt owed to the financing entity.

An introduction to Greensill Capital

Now that you may consider yourself an expert in supply-chain finance, it’s time to become acquainted with Greensill Capital itself and its founder – Australian businessman Lex Greensill.

Born and raised on a family farm in Bundaberg, QLD, Greensill soon found himself in the concrete jungles of London. Here he began working in supply-chain financing at American bulge bracket investment banks Morgan Stanley and later, Citigroup. [4]

In 2011, Greensill decided to go solo by forming his own supply-chain financing firm. In 2014 Greensill purchased a German bank to assist in its operations (hence the particular interest by German regulators in the present day) and three years after that arranged a funding facility with Swiss investment bank Credit Suisse.

Much of Greensill’s rise to becoming a major player in supply-chain financing circles can be attributed to its relationship with British-Indian businessman Sanjeev Gupta and his conglomerate, GFG Alliance. Gupta – dubbed the ‘saviour’ of Britain’s ailing steel industry – is renowned for acquiring and reinvigorating otherwise declining steel plants throughout the world. His portfolio of assets includes Australian company Infrabuild and the Whyalla steelworks in South Australia. [5]

How the proverbial hit the fan

Much of Greensill’s woes can be traced to the level of exposure it had to the GFG Alliance conglomerate. After beginning his venture with secure investments in reliable clients, more and more of Greensill’s balance sheet became reliant on Gupta’s company – a risky proposition given the opaque nature of GFG’s financial transactions.

Fast forward to March 2020 and Greensill’s relationship with GFG leads to both Credit Suisse and insurer Bond & Credit Co. (BBC) severing its ties with the firm within the space of a week. Both Credit Suisse and BBC cite Greensill’s exposure to Gupta’s conglomerate as their primary concern, with BBC having already sacked the officer charged with its Greensill dealings all the way back in July 2020. [6]

To further compound Greensill’s woes, Gupta suspended its payments to the firm, and German regular BaFin filed a criminal complaint against Greensill’s Frankfurt-based bank which it acquired in 2014.

Friends in high places

In the months since, anyone and everyone associated with Lex Greensill’s brainchild has been tarnished with its quick yet spectacular unravelling. Two of the biggest names associated with the firm include former British Prime Minister David Cameron and former Australian Foreign Minister Julie Bishop.

Cameron has been hammered in the British press for his lobbying efforts as an advisor to Greensill Capital – including texts and emails to the most senior members of Boris Johnson’s government. As later revealed by a Treasury select committee investigating the collapse of Greensill Capital, Cameron’s lobbying efforts included Cabinet Office minister Michael Gove and the rising star of Johnson’s cabinet, the social-media savvy Chancellor himself, Rishi Sunak. [7]

David Cameron’s involvement with Greensill is made all the more distasteful when one considers his snide criticism of lobbyists during his tenure at No. 10. [8]

“We all know how it works. The lunches, the hospitality, the quiet word in your ear, the ex-ministers and ex-advisers for hire, helping big business find the right way to get its way.”

By comparison Julie Bishop’s links to the collapse of Greensill have been much less controversial. Her appointment as the chairwoman of Greensill’s Asia-Pacific business in 2019 is much more an indication of Greensill’s good times as opposed to an indictment in any way on the former foreign minister.

Ultimately, all of Greensill’s woes can be tied back to biting off more than they could chew through its dealings with Gupta’s empire. The conglomerate’s business dealings being shrouded in secrecy was widely known, and despite the positive recognition for transforming steel industries throughout the west – Greensill willingly took on an incredibly risky proposition and paid the price. [9]

Perhaps it’s appropriate to end with some words of time-honoured wisdom: If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

References

  1. Australian Financial Review. 2021. Greensill liquidation deepens focus on directors. [online] Available at: <https://www.afr.com/companies/financial-services/greensill-liquidation-deepens-focus-on-directors-20210422-p57lgf> [Accessed 26 May 2021].
  2. pwc.com.au. 2021. Understanding Supply Chain Finance. [online] Available at: <https://www.pwc.com.au/publications/pdf/supply-chain-finance-jul17.pdf> [Accessed 26 May 2021].
  3. Spglobal.com. 2021. Supply chain finance grows amid pandemic, but faces stark risk warnings. [online] Available at: <https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/supply-chain-finance-grows-amid-pandemic-but-faces-stark-risk-warnings-58841608#:~:text=Idiosyncratic%20risks,according%20to%20S%26P%20Global%20Ratings.> [Accessed 26 May 2021].
  4. Simon Duke, L., 2021. Lex Greensill’s rags-to-riches story is unravelling. [online] Thetimes.co.uk. Available at: <https://www.thetimes.co.uk/article/lex-greensill-s-rags-to-riches-story-is-unravelling-fast-8s6twz5gn> [Accessed 26 May 2021].
  5. the Guardian. 2021. Sanjeev Gupta: from college dorm deals to UK steel’s great hope. [online] Available at: <https://www.theguardian.com/business/2016/apr/06/sanjeev-gupta-uk-steel-tata> [Accessed 27 May 2021].
  6. Australian Financial Review. 2021. How the Greensill empire was brought down. [online] Available at: <https://www.afr.com/companies/financial-services/how-the-greensill-empire-was-brought-down-20210305-p57803> [Accessed 27 May 2021].
  7. Ft.com. 2021. UK regulator investigates collapsed Greensill Capital. [online] Available at: <https://www.ft.com/content/06666acc-ee6c-471b-94e2-b05ff3645d0d> [Accessed 27 May 2021].
  8. Australian Financial Review. 2021. Cameron’s flattery on show in his lobbying for Greensill. [online] Available at: <https://www.afr.com/world/europe/cameron-s-flattery-on-show-in-his-lobbying-for-greensill-20210512-p57rb6> [Accessed 27 May 2021].
  9. Ft.com. 2021. How Sanjeev Gupta’s empire is fuelled by opaque financing. [online] Available at: <https://www.ft.com/content/e8e2d33c-dfb3-11e9-b112-9624ec9edc59> [Accessed 27 May 2021].