Greensill Fail Draws Scrutiny To Supply Chain Finance

So far, Greensill’s collapse has not had any negative impact on the appetite for confirmed receivables finance deals.

The supply chain finance provider Greensill Capital used to describe itself as “a world-leading fintech challenging the status quo.” That it has, as its collapse last month leaves fingers pointed at regulators and credit insurers who industry insiders say failed to heed the warning signs.

Founded in 2011 by Lex Greensill, former head of SCF at Morgan Stanley, with funding from SoftBank, Greensill Capital filed for insolvency on March 8 after one of its main insurers pulled the plug on credit insurance it had provided to the firm’s debt portfolios. What went wrong?

On one hand there was the SCF business, which extended early payment to the suppliers of large creditworthy buyers at a discount. Greensill would then package the short-term financing or receivables into investment notes, which were credit insured, and sell them on to investors, including funds operated by Credit Suisse.

But Greensill is also alleged to have financed prospective receivables from prospective buyers, which means it was providing financing against receivables that may or may not materialize in the future. “Most of the financing in SCF is done on a confirmed basis,” says Oliver Chapman, group CEO of OCI Ltd, a London-based supply chain procurement partner. “You identify the cargo is present and correct. Banks should be able to verify that the receivable is confirmed, an invoice has been raised and the cargo is received.”

Greensill Capital, Chapman says, was providing financing against unconfirmed “potential future receivables.” “It’s incomprehensible that they exploited the finance facilities for this long without a real buyer or an actual supply,” Chapman says. German’s Federal Financial Supervisory Authority (BaFIN) filed a criminal complaint against the management of Greensill Bank in Bremen, on March 3, saying the bank “was unable to provide evidence of the existence of receivables.” Greensill Capital was GFG’s biggest lender; Greensill Bank was Greensill Capital’s refinancing arm.

So far, Greensill’s collapse has not had any negative impact on the appetite for “genuine” confirmed receivables finance deals, says Chaman. But Fitch Ratings said late last month that it could lead to tighter regulation and greater transparency requirements for SCF.