Greensill Capital tumbles into insolvency, spreading financial pain

Greensill Capital has filed for insolvency protection, days after regulators took over its banking unit and Credit Suisse froze investment funds.

Lex Greenshill of Greensill Capital: Picture: Annabel Moeller

Greensill Capital filed for insolvency protection Monday, days after regulators took over its banking unit and Credit Suisse Group AG froze investment funds that were critical to the startup’s operations.

The unwinding has rippled to holders of the Credit Suisse funds, German municipalities that deposited money with Greensill’s bank, and a high-profile duo of venture-capital investors.

Greensill specialized in supply-chain finance, a type of short-term cash advance to companies to stretch out the time they have to pay their bills. The firm was once worth $4 billion based on investments from SoftBank Group Corp.’s Vision Fund. The collapse marks a high-profile blow for the mammoth Japanese investor.

Founded by Australian-born Lex Greensill, the company billed itself as a technology startup that competed with traditional banks such as Citigroup Inc. and JPMorgan Chase & Co. Greensill’s goal was to offer supply-chain finance to companies that had fallen below the radar of traditional banks that preferred larger, more-established clientele.

In a typical supply-chain finance deal, Greensill would pay a company’s suppliers sooner than they would normally expect, but at a discount. The company then would pay Greensill the full amount down the road. The supplier would get paid early, the company would have more flexibility over its cash, and Greensill would be left with a small profit.

Instead of holding the cash advances -- which typically get renewed every 60 or 120 days -- on its balance sheet like a traditional bank, Greensill spun most of them into bondlike securities, or notes.

Investment funds managed by Credit Suisse and GAM Holding AG scooped up those notes, providing professional investor clients with what appeared to be a low-risk way to eke out higher returns than could be gained in bank accounts or money-market funds. The funds in essence served as off-balance-sheet financing for Greensill.

Greensill’s operations seized last week when Credit Suisse stopped investors from moving money in or out the $10 billion in supply-chain investment funds. GAM followed suit the next day with its $800 million fund. Both have said they would wind down the funds.

The Credit Suisse move was triggered after Greensill lost coverage from a set of credit insurers that provided protection in case the startup’s clients defaulted.

The insurance was crucial because it made Greensill’s assets appear safer to Credit Suisse’s institutional investors, some of whom are restricted from putting cash into riskier investments.

The Credit Suisse and GAM funds could face losses if Greensill’s clients aren’t able to pay back their supply-chain finance loans. More than 50% of the borrowers in the Credit Suisse funds were based in the U.S., including blue-chip companies and government agencies.

As part of its insolvency process, Greensill is in talks to sell its core operations to Apollo Global Management and its insurance affiliate Athene Holding Ltd. for around $100 million, The Wall Street Journal previously reported, citing people familiar with the matter.

Greensill’s loans were mostly short-term, and some customers without access to cash will need to find alternate sources of financing in the coming weeks and months. Apollo will use Athene Holding to fill in the funding gap for some, but not all, of Greensill’s clients. It has been reaching out to Greensill clients in recent days, the Journal has reported.

Greensill’s operations have grown rapidly in recent years. The number of staff ballooned to more than 1,000 employees in 2020 from 600 the year earlier. It has also been on an acquisition spree, picking up a string of fintech businesses in the past 18 months, including Finacity Corp., Earnd and Omni Latam.

SoftBank’s Vision Fund was set to write down its $1.5 billion Greensill investment, t he Journal previously reported, citing a person familiar with the matter. The startup’s other big outside backer, private-equity firm General Atlantic, held a roughly 7% stake in Greensill.

Further pain was being felt in Germany, where Greensill owned a small bank. The country’s financial regulator, BaFin, recently appointed a special representative to oversee day-to-day operations of Bremen-based Greensill Bank.

A preliminary tally shows that as much as 700 million euros of Greensill Bank’s deposits, equivalent to $830 million, out of a total of EUR3.6 billion, or $4.3 billion, weren’t covered by deposit insurance, according to a person familiar with the bank. Some of those deposits were held by German municipalities, which were attracted to Greensill for its slightly higher interest rates. German banks have increasingly been passing on negative rates to their customers. Municipalities in Germany aren’t eligible for deposit protection.

“We are shocked,” said Jonathan Berggötz, mayor of Bad Dürrheim, a tiny spa town in the Black Forest that had EUR2 million euro deposited in Greensill Bank. “We will use every opportunity to get our money back,” Mr. Berggötz added.

Three other towns in Germany said they face losses of EUR6 million to EUR38 million each.

Greensill acquired the small German lender in 2014 for around $20 million. In 2019, Greensill used the bulk of an $800 million investment from SoftBank’s Vision Fund to recapitalize the German lender, boosting its regulatory buffers.

It used the bank both to lend directly to clients in traditional loans and to fund its supply-chain finance deals until it packaged and sold some of them off to the Credit Suisse and GAM funds.

“The bank is as much as anything a warehouse that provides us with the ability to manage the liquidity requirements of our business,” Mr. Greensill said in a 2019 interview.

Executives at Grant Thornton U.K. will oversee Greensill’s insolvency procedure. Also caught up in Greensill’s problems was U.K. steel magnate Sanjeev Gupta. Greensill had $5 billion in loans outstanding to his GFG Alliance of companies, according to a person familiar with the relationship. With operations in a dozen countries, Mr. Gupta relied heavily on Greensill for financing.

A spokesman for GFG Alliance said that the company continues to operate as normal and that it is in discussions with financial institutions on further funding.

--Ben Dummett contributed to this article.

Dow Jones Newswires