Greensill Capital – When Good Supply Chain Finance Turns Bad

Readers of the Financial Times (or the Sydney Morning Herald) will be well up to speed with the events at Greensill Capital, a leading provider of supply chain finance funding and solutions. Other broadsheet newspapers and websites are also getting increaingly interested in the story.

Lex Greensill is the son of an Australian watermelon farmer. After an early career at Morgan Stanley and Citibank, he made a big impact in the UK as a “crown commercial representative” in Cabinet Office and supply chain finance tsar for David Cameron’s government. When Cameron stepped down, Greensill made him an adviser with (allegedly) a barn-full of share options.

Greensill also recruited Bill Crothers, government’s Chief Commercial Officer (the top procurement man) from 2012-15. Crothers was deputy chairman of Greensill for a while but resigned as a director in February, and has perhaps sensibly dropped all reference to Greensill now from his LinkedIn profile. Greensill also incomprehensibly got a CBE from the Queen in 2017, whilst Crothers got a CB in 2013, the equivalent award for civil servants.

However, in a few short months, Greensill Capital has gone from planning a flotation that would have valued the firm at $7 to basically going under. We don’t have the time or space to go into all the details here, but broadly, the Greensill proposition was this. A firm such as Vodafone might offer suppliers payment terms of, say, 60 or 90 days. But the suppliers have another option. Instead of waiting for payment, they can get immediate cash from Greensill – at a small discount. So if Vodafone owes you £10,000, then you can get paid now by Greensill for perhaps a 2% discount (£9,800).

Then of course Vodafone pays Greensill the £10K after 60 days, so Vodafone benefits from a cash flow perspective. Greensill makes its money on that margin (the £200).  Nothing wrong with this conceptually or ethically. Another version of this sees the finance provider making their offer to a supplier (rather than a buyer). So the finance might cover immediate payment against a wide range of invoices that the firm has issued.

Where does the cash come from?

In both cases, Greensill has to find the money to pay out up front to suppliers. Historically, the banks have offered this sort of service, because they have easy availability of money. But Greensill had to find a way of raising the cash. So they packaged up the offering into bonds, offering investors a decent rate of return, in return for providing the funding for the scheme. If you can turn over that funding 6 times a year based on 60 days payment cycle, making 2% each time, that is 12% – plenty to offer bond holders a decent return and make millions for Greensill too.

Just to make it even safer, the bonds were insured, so an investor knew that even if Greensill somehow didn’t get all the money owed to them back from the buyers, they were protected. So what went wrong?

The unravelling started with Greensill’s insurer refusing to continue covering that risk. The firm failed to find an alternative – so no insurance meant they couldn’t raise finance and could not continue to offer the service.  But the big unanswered question is this. Exactly WHY did insurance companies refuse to provide insurance? I mean, blue chip clients such as Vodafone aren’t going to renege on their agreement to pay Greensill (which for Vodafone is in effect simply the equivalent of paying their suppliers)?

So there must be more to it. Maybe Greensill has offered the service to buyers or suppliers who were less solid and secure than Vodafone, so the risk of default was greater. The position also gets murkier if you consider this possibility. What if the buyer / supplier relationship at the heart of the transaction was an inter-company relationship?  So one part of my business supplies another, and the supply side gets the payment from Greensill based on those invoices. But what if my sister company doesn’t really have the cash on the buy-side to then repay Greensill? It could be a way of raising money for a struggling firm, but maybe the underlying transactions aren’t even genuine?

One client of Greensill in particular has cropped up as a concern, and represents a pretty large proportion of the total business – do a bit of Googling and you can read more (it’s NOT Vodafone, I should stress)!  That might have got the insurance firms worried, to say the least. Then there was the alleged extravagance from Greensill. For what was still a pretty young business, running four corporate jets seems a little questionable.

So we will see what emerges in coming weeks, months and probably years. The reputations of Greensill, Crothers and Cameron are on the line, as well as potentially real jobs and businesses. There is nothing wrong with supply chain finance per se – but we might see the accountants and regulators looking harder at how firms report on their use of the technique.  And in the next edition of Bad Buying, will this go down as a failure, a fraud or a f**k-up? Time will tell.