British lenders have been told to quantify their exposure to Greensill Capital to the Bank of England after the trade finance lender went into administration today.
Grant Thornton has been appointed as administrator, with US private equity firm Apollo Global expected to buy some of the best assets in a pre-pack deal.
Reports ahead of confirmation suggested that loans to GFG Alliance, the owner of British Steel through its Liberty Steel arm, were not part of this deal, increasing the uncertainty over its future and 5,000 direct and indirect employees.
It was the size of the loans to GFG that apparently prompted insurer Tokio Marine, Credit Suisse and the Swiss finance house GAM Holding to withdraw their financial support to Greensill.
Credit Suisse suspended around US$10bn of funds linked to Greensill, saying on Monday it had doubts over the true value of the funds, while the following day Swiss asset manager GAM Holdings announced it would close its US$842mln Greensill supply chain finance fund.
The apparent collapse of Greensill will set alarm bells ringing as its business has echoes of the collateralised debt obligations (CDOs) that were said to be behind the financial crash in the first decade of the current century, except in this case instead of parcelling up mortgages and selling them on Greensill buys up invoices and securitises them.
From a supplier’s perspective, the practice of accepting a small “haircut” on the money it is owed by a customer in return for immediate payment makes sense in terms of alleviating cash flow problems; however, it can also disguise rising levels of debt, as happened with collapsed contractor Carillion, because accountants do not treat supply chain finance deals as debt.
Greensill’s current problems came to light after the German banking regulator, which has a representative placed inside Greensill Bank, a Bremen-based subsidiary of Greensill, took over day-to-day control of the bank, according to reports from news agency Bloomberg and the financial daily, The Financial Times.
Apollo’s rescue deal, if it pulls it off, should see it take a chunk of the supply chain financing contracts while insurance cover is likely to offset losses for others caught out by Greensill’s decline.