Greensill
A lot has been said and written around Greensill and their spectacular demise. Some stories have focused on the risk underwriting, some on conflict and a few others have chosen to cover the eponymous founder’s lifestyle and his rolodex. In this piece, I will try and take a slightly different approach to this story and focus on the dichotomy of the assets originated by Greensill and argue that in the end the outcome for the ultimate underwriters was a function of how open (or closed) their eyes were.
Its perhaps a bit simplistic but with the benefit of hindsight, one way to think about Greensill’s assets or clients is to classify them as being associated with Good Greensill or with Bad Greensill. A product level stratification, including Finacity business, is perhaps not so useful for this current analysis.
The Good Greensill had assets originated largely from Investment Grade (IG) names, generated during the client’s normal business and were often placed upon origination with relationship banks of these IG clients (i.e. the risk for these was borne by relationship banks of these clients). Greensill followed the age-old supply chain finance origination technique in getting these mandates. These clients do not want to deal with multiple banks which involves (a) negotiating and signing multiple documents (a) multiple integrations on varied systems to connect with these banks; (c) multiple onboarding processes for suppliers with different banks; and/ or (d) spending time and money splitting or allocating suppliers to each bank. So they allocate the business to one (or two) large financial institutions who in turn invite other banks to join as participants in these programs — and this helps the program scale much faster while providing clients with necessary liquidity and a degree of mitigation by spreading the risk amongst banks even though its fronted by only a few.
For this book, Greensill’s ostensible USP was in their ability to beat down pricing, increasing program efficiency and by offering a better platform (they used a well-known 3rd party platform for this). These assets were then assigned or sold to relationship banks who — if they were comfortable with Obligor risk and dealing with Greensill — were able to provide liquidity into these programs through risk participations or risk purchase.
The Bad Greensill had assets that were structured to appear like short term receivables or payables and there is a lot of information now available in respect of the business with Gupta Family Group (GFG) Alliance and Bluestone Resources which leaves little doubt in respect of the real nature, purpose and tenor of these financing arrangements. These seem to be either booked wrongly as short term assets (with auto rollovers at times) or based on future receivables (allowing space for a lot of creativity) but pending linkage to a genuine underlying flow, seem to be direct, long-term lending facilities to these companies (and poorly structured at that) than being trade finance or supply chain finance.
It appears that the banking market was by and large able to see the woods for the trees and therefore in spite of the size of the debacle, the impact on supply chain finance programs and market in general and the Good Greensill programs in particular seems to have been minimal. With some hiccups and delays, most programs found a home and financiers willing to support them in a short span of time.
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The Good Greensill programs should have been enough to build a good business at scale but these suffered from a few issues: (a) returns generated did not meet the profile of returns that key actors aspired for; (b) while Obligor risk assessment is key, association with Greensill and negative press around them meant that not all banks wanted to do business with Greensill; and (c) banks are by nature slow, bureaucratic and while it’s possible to find pockets of efficiency, the wheels would never turn fast enough to support the churn of assets Greensill was bringing through the doors.
This naturally led to the alternate distribution through the funds (CS and GAM) where the investment case analysis seems in hindsight to largely rest on Rating (enter insurance) and some broad strokes (I grant this is unfair. The argument being made is that the parties responsible did not earn their keep in so far as appropriate due diligence is concerned). If you throw in additional non-Investment Grade (higher risk) names which also defaulted, this raises even more questions around the quality of diligence outside of a cursory check around presence of insurance cover and the credit grade.
Clearly, the fund managers were either too pleased with this business to ask the right questions around concentration, asset quality and/ or just the underlying. While banks do not necessarily get all of this right all the time (please pardon the understatement), the stringent demands from regulators on the way Banks assess risk weights and the monitoring, and potential risks to reputation and penalties, implies the connection to underlying gets adequate attention from the banks. Its perhaps also fair to say that neither the funds, nor the fund managers and certainly not Greensill (!) had any incentives to monitor and/ or control this.
This shows up in the divergence in fates of the funds as against the banks who were supporting relationship business for their clients. While not all Good Greensill’s business found its way to the Banks, it seems that very little, if any, of Bad Greensill’s business found its way to the Banks for reasons outlines above. This is not an accident — firstly banks are relationship driven and if there was a bankable deal to be done for GFG and / or Bluestone Resources on an unsecured basis on these terms, it’s reasonable to assume that banks would have been the first port of call for these companies (while fintechs have taken the proverbial cream in the short term trade finance market, the term financing market does not seem to be an area of focus for them). I will go a step further and argue that Greensill was not marketing these assets to Banks as the credit analysis was likely to be name level, granular and relationship driven (none of which seemed to have burdened the said funds).
A deeper analyses of trust and collection arrangements that Good Greensill had in place may throw more light on this but it appears that most IG names were able to switch service providers (along with their banks — albeit with some delays) and most banks left the train wreck with their balance sheets largely intact (unless they had funded individual obligors which went bust — like NMC — which will happen from time to time — Greensill or no Greensill). Unless sizeable, banks do not report such gaffes publicly (a convenience not afforded to the said funds unfortunately), so we must account for that bias but still the script largely holds.
In the final assessment, the cost and impact of Greensill’s demise has gone to the place that certainly was least prepared for it or less diligent — and not to the part of financial system that had its obligor diligence in place and on point.
A fool and his (client’s) money are soon parted.
