Greensill: A Clue to Supply Chain Finance Problems?
In the middle of Greensill CapitalApparently, the question needs to be asked as to whether something specific to the company caused the pressures and problems, or if this is what could be considered “one-off”.
As has been reported, the supply chain finance company is facing what could be an existential crisis. Earlier this week, Credit Suisse Group AG froze $ 10 billion in investment funds that have been critical to Greensill’s operations. Credit Suisse’s asset management division has said it will not let lenders buy or sell four private equity funds that rely solely on Greensill securities. Another fund manager, GAM Holding, has frozen its own investment activities related to Greensill.
“A certain portion of the assets of the sub-funds is currently subject to considerable uncertainty as to their fair valuation,” according to a statement from Credit Suisse. Looking a little further, Credit Suisse would be concerned about Greensill’s exposure to a single individual – Sanjeev Gupra, a British businessman specializing in the steel industry.
With investment funds frozen, Greensill has turned to Grant Thornton to think about a restructuring, and insolvency may be on the horizon. Or, the company can find an outright buyer in Apollo Global Management, at a purchase price of around $ 100 million.
However, here’s a wrinkle: Last May, the company said it had provided a “final warning” to companies that use supply chain finance to extend payment terms beyond 30 days.
As described by the Wall Street Journal, the business of supply chain finance works when Greensill pays a client company’s supplier (s) early in exchange for a discount. The full amount is then paid to Greensill by that company. The cash advances are then packaged and sold. These aforementioned Credit Suisse funds are invested exclusively in the Greensill business, with these investments being sold to other holders.
Essentially, we argue that there is a layer of supply chain finance activity and then a securitization / secondary market for that activity. But when part of the chain freezes, so to speak, fraying occurs quickly.
There have also been turbulent places before. As reported in May of last year, a few Greensill clients have defaulted, due to their own accounting scandals and other pressures. These corporate events forced Greensill and its insurers to cover losses in investment funds like Credit Suisse Asset Management. To get a feel for the scale, the FT reported at the time that funds were exposed to nearly $ 120 million at struggling companies, including Agritrade and BrightHouse.
At the end of 2019, Moody’s Investors Service concluded that supply chain finance, also known as reverse factoring, could actually hurt liquidity. “Users of financial statements may not be aware of a client’s use of reverse factoring, despite the potentially significant consequences,” Moody’s associate managing director William Coley said in a statement. “The client himself may not fully understand the additional risk that comes with using this financing technique.”
And even, as PYMNTS noted, there is a real need for some type of technology-driven ointment for what is considered a “trade credit deficit” estimated at nearly $ 1.5 trillion. In an interview with PYMNTS, George Lee, COO of CCRManager, noted that digitization (and efforts that include supply chain finance) have not narrowed this gap.
“Digitization [is] happens in the pockets, but trade finance is highly interconnected and [an] interdependent system, “he said.” Global efforts are still far from being sufficiently collaborative, and this translates into a disconnect between said pockets of digitization. “
Now it may be that the supply chain finance model – with its promises of higher returns to “end buyers” of securitized loans – hiccups or takes a break. Investors may be a bit more reluctant to provide the financial backing to support these early compensation programs, pushing businesses large and small to adopt other ways of handling day-to-day B2B business / payments between buyers and sellers. providers.
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