Posted 01/04/2021 – Quick takes

Greensill, until recently, was lauded as an innovator in the provision of supply-chain finance and an important provider of liquidity into the complex web of global trade.

In simple terms, due to terms of credit buyers normally receive cash for their goods less quickly than they would like. So instead, a seller was able to borrow money from Greensill by selling Greensill its trade receivables. In effect, Greensill would pay the sellers for their goods earlier then they might normally receive the cash from their customers (albeit at a discount to the sum owed) and then collect the full payment later from the buyers. (N.B. Greensill also financed trade payables.)

Given that this process often involves large, respected multinationals as the buyers (and therefore unlikely not to pay for the goods in time) Greensill’s activities were deemed to be safe, short-term financing. Greensill then bundled various loans into notes and insured each portfolio of loans against default. These insurance policies were arranged by Greensill’s brokers, Marsh, and included Tokio Marine, via its subsidiary BCC, and Insurance Australia Group (IAG). With the benefit of such insurance, the notes were deemed to be very low risk and could be sold to funds manged by the likes of Credit Suisse whose clients were desperate for better returns than the incredibly low yields offered by other very low risks instruments, such as money-market funds.

However, Tokio Marine gave notice that it would not be renewing its insurance cover when it expired on 1st March 2021 and without this cover Credit Suisse was unable to buy the loan portfolios for its funds. Greensill’s funding therefore dried up and it was forced into insolvency. The reason for the withdrawal of cover is still not 100% clear, but it seems that Greensill’s lending was (i) concentrated amongst a small number of clients, (ii) that there were potential conflicts of interest and (iii) that some of the lending was, in fact, much riskier longer-term lending. Indeed, companies such as Bluestone Resources received money to finance “prospective receivables” from “prospective buyers” i.e. receivables that had not yet been generated from entities that were not and might not ever become customers. Bluestone have since sued Greensill for the withdrawal of what were explicitly designed to be long-term loans, “based not upon the existence and collectability of Bluestone’s then-existing receivables, but rather based on Bluestone’s long-term business prospects.”

QBE and IAG have now both said that they do not have any net exposure to Greensill. Bloomberg recently reported that BCC could expect a larger-than-expected exposure to the collapse of Greensill because reinsurance bought by Tokio Marine’s Houston-based HCC credit insurance business does not extend to BCC. Tokio Marine has said, in response to equity market speculation, that its exposure to the Greensill Capital collapse would not have any “material impact” on its results. Tokio Marine said that it would maintain its guidance for the current financial year, with analysts expecting the hit from Greensill to be in the range of US$90-180m. Tokio Marine has also said it also continues to assess the validity of any insurance policies at the heart of Greensill’s downfall because the receivables might not have even existed (as per the Bluestone example above) as well as reiterating that a large part of any risk is covered by reinsurance. Tokio Marine s510 have told us that any impact will be “immaterial.”

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