Greensill Capital is a UK-based commercial finance company which filed for bankruptcy protection in early March. The company had focused on providing financing to companies using supply chain financing and other related receivables finance services. 

The bankruptcy appears to have been the result of a combination of factors: unusual underwriting practices (by Greensill, their primary financier and their credit insurer); the cancellation of their credit insurance policy; the cessation of their source of financing by their largest funder and financial intermediary;  related party transactions inclusive of financing, as well as obtaining financing from one of their investors and in turn using such funding to finance the investor’s own affiliates.

While the final outcome remains to be seen in the ongoing saga, it is clear the circumstances are not typical for a supply chain finance institution. The Greensill model is in a number of ways unique among bank and non-bank supply chain finance programs, including the manner in which they accessed capital markets to fund purchases of receivables.  For most, the timing and issues around valuing these “assets” are only customary as to credit exposure, rather than matters of securities type disclosures.

TSL Express spoke with several SFNet members to get their views on the evolving matter.

Paul Schuldiner, executive vice president & division manager with Rosenthal & Rosenthal said, “I don’t believe that you can or should characterize the practices of Greensill as typical of the world of supply chain finance providers. The Greensill situation from all publicly reported accounts may have had potentially deceptive management practices, poor disclosure, over-reliance on credit insurance, which is a risk mitigant tool, but does not eliminate credit risk or the need to fully underwrite your buyer and seller base, and concentration within their portfolio.” He pointed out that these combined factors made a difficult situation significantly worse.  “As in any commercial finance business, adherence to the fundamentals and proper disclosure of problems or a change in fundamentals or market conditions are some of the keys to properly managing the business,” Schuldiner concluded.

Jo Bennett-Coles, managing director at FGI, agreed with Schuldiner that it appears Greensill exceeded a prudent level of concentration: “What we know of the background to Greensill so far (and this story has a way to unravel yet) is that there has been a high level of concentration in the portfolio and across the lending group coupled with some very concerning historical financial information. This is sounding a bit familiar.”

She went on to say that the big question here is: were underwriting fundamentals and robust risk-management tools diluted or ignored? Was information transparent? “Big numbers can create a false sense of comfort, but if you ignore the basic risk-management cornerstones, then you are on a dangerous pathway.”

Supply chain finance is a valuable product, but the Greensill situation will most likely have a global impact, directly into the steel sector and more widely as the fallout creates a tsunami effect, according to Bennett-Coles. “If, like other working capital solutions, Supply Chain Finance programs are managed within the correct rules, then there is no cause for alarm. At the end of the day, this story will boil down to transparency of information – both internally amongst all the key players in this saga and externally with disclosures to the wider market. Who knew what when and what did they do about it?”

 “Although we don’t yet know the specifics of the Greensill situation, it sounds like this was an example of a finance business possibly emphasizing growth over safety and not relying on the fundamentals of finance,” said Ed King, founder & managing partner of King Trade Capital. He echoed the belief that Greensill seemed to have “too much concentration and improper structure.” According to King, supply chain finance can have various structures, but ultimately relies on this question: can the end customer pay for what is delivered and is the client a sound business that can operate profitably if provided suitable financing to perform and deliver its product? 

King went on to say: “In recent years, supply chain finance businesses have benefited from technology enabling them to better follow and finance cross-border sales. But, with this technological innovation, has come the type of financial innovation we see here with Greensill, to raise more capital to offer financing to support more cross-border sales to less creditworthy and higher-risk companies.”

Another concern, said King, is when finance companies utilize credit insurance to insure the client rather than the end customer. “This reverse financing works to a certain extent with clients with good credit, but can miss the basics of supply chain finance: can end customers pay? Ultimately, if credit insurance is the primary risk mitigant rather than used as a back up to sound underwriting and repayment structures, there is a high risk of problems when economies slow.”

King is confident that the vast majority of experienced supply chain finance companies act responsibly as to avoid putting too many eggs in one basket of risk.

According to Richard Hawkins of AtlanticRMS, the market needs to be able to differentiate between the various forms of supply chain finance: “The term supply chain finance has come to represent a number of different types of trade finance and the Greensill situation has the potential to call into question other legitimate and often collateralized forms of trade finance. What needs to be understood in any financial transaction or instrument is where and with whom the actual risk resides. Sometimes the driver behind the provision of SCF programs is to generate excessive leverage and facilitate financial window dressing. It is now clear that the structures involved were overly complex, enabled excessive concentrations and related-party transactions. As usual, when a story like this breaks, it is often the case that fundamental principles of Risk Management has been ignored or over-ridden.”

Donald Clarke, president of Asset-Based Lending Consultants, commented: “Supply chain finance is a recent added entrée on the asset-based lending menu, which serves to help smaller companies compete with bigger ones on a global scale.”

Clarke explained the basics: “The finance provider steps in and buys merchandise on behalf of the buyer, allows them extended time to pay and they don’t have to worry about suppliers cutting them off. This is a very valuable in a global competitive economy, but like in any credit facility, the lender must be diligent in its monitoring of such facilities.”  While most of these facilities are protected by credit insurance, Clarke pointed out the conditions under which to file claims are very strict and, as in the case of Greensill, will drop the coverages or raise the cost prohibitively on the first sign of an emerging crisis. 

“I believe the Greensill case is an anomaly exacerbated by COVID-19 and SCF is a viable tool and will remain so in order to finance growing companies in a competitive global economy because it provides the purchasing power to borrowers who don't have the equity base or lending facilities to play in the game," Clarke said.