As with AIG in 2008, it is once again insurance – the supposedly sober, even sleepy side of finance – that is key to understanding the Greensill crisis.
In supply chain finance, a large company like Vodafone would tell their suppliers that, rather than waiting weeks for their bills to be paid by the telecom group, they could get a much faster payment from Greensill Capital. , with a small discount.
Greensill would pay the supplier and later accept a slightly larger payment from Vodafone. The supplier was paid faster, Vodafone was able to smooth their payments, Greensill took a small margin.
This effectively created a loan from Greensill to Vodafone. And to keep the machine running, Greensill would sell the loan so he could write more. The main client of the loans was Credit Suisse, which placed them in funds sold to outside investors. Until this week.
Swiss credit suddenly announced Monday he was freezing the funds. The reason? A failure in the insurance covering the credit, which had allowed investors to treat the fund as almost risk-free – almost as secure as money in the bank but with a slightly better return.
As Greensill’s lawyer said this week, insurance “allows Greensill to access sources and levels of funding that it would not otherwise have been able to access and which are critical sources of funding for his company “.
Just as AIG was the global banks’ counterparty for credit default swaps in 2008 and Berkshire Hathaway was Deutsche Bank’s counterparty for super senior leveraged transactions in 2009, Greensill’s insurers played a vital role in a complex financial trading.
Without them, the machine was stuck. Greensill could not offload loans and therefore could not take new ones. This is not practical for first-rate customers such as Vodafone. It is potentially devastating for smaller businesses such as those associated with Sanjeev Gupta, the metal tycoon, who are among Greensill’s biggest borrowers.
For at least four months, Greensill used a well-known broker, Marsh, to try to find alternative insurers, according to court documents. None wanted to intervene.
This week, Greensill took the desperate step of suing its existing insurers – BCC Trade Credit, Tokio Marine and Insurance Australia – in an attempt to force them to reinstate coverage.
Greensill told an Australian court on Monday that if the policies were not extended, “Greensill’s economic viability would be immediately and seriously jeopardized as its main sources of funding and income would cease immediately.”
In addition, Greensill said he had “been told by a number of clients” that the loss of insurance “would very likely make them insolvent”. These customers would default on their Greensill obligations and Greensill’s investors would withdraw their support.
A judge ruled against Greensill and insurance was not reinstated.
Why have insurers removed coverage? Court documents show that the original main policy was written by The Bond & Credit Company, an Australian insurer acquired in 2019 by Japanese company Tokio Marine.
The insurance group wrote to Greensill in July last year to say that the underwriter in charge of the account was terminated because it was found to be insuring amounts to Greensill “beyond his delegated authority” , with a total exceeding AU $ 10 billion. ($ 7.7 billion).
The group added that it had opened an investigation “into the transactions between Greensill Capital and [the underwriter]”, Including in other areas“ where he acted outside the framework of his delegated powers ”. As he continued his investigation, he asked Greensill for other documents, including “any guarantees provided by SoftBank.”
SoftBank’s Vision Fund holds an interest in Greensill. Other companies in the Vision Fund’s portfolio, such as India’s Oyo hotel group, also use Greensill to pay vendors. And, finally, like the Financial Times revealed last june, SoftBank had also poured over $ 500 million into Credit Suisse funds, essentially using its own finance company to lend to its own holding companies, and then investing in that debt itself.
Regardless of the specific development that alarmed Tokio Marine last summer, its decision to stop coverage – unknown to the world – sounded the death knell.
In July, the insurance group wrote to Marsh: “Given the current situation, we will not be able to initiate new policies, take any additional risk, or extend or renew any Greensil. [sic] policy beyond what had previously been agreed. Please consider this statement as a comprehensive response to any request from Greensil to review additional limit coverage, maximum limit capacity or the timing of a policy period. “
Greensill refused to accept the decision, but its air of finality was unmistakable.
Reporting by Jamie Smyth in Sydney, Robert Smith and Arash Massoudi in London