Lex Greensill Spotted His Weakness Before Jet Flight

(Bloomberg Opinion) -- The trigger for the unwinding of Lex Greensill's supply-chain finance empire was, in the end, rather arcane: Credit insurers didn't renew coverage of some of the holdings in the Credit Suisse supply-chain funds for which Greensill sourced assets.

Credit insurers are a vital but often overlooked cog in the global trade system, providing cover for businesses in case their customers don't pay their bills. Without the insurance underpinning Greensill's invoice-backed loans, the assets became difficult to value and the funds closed to redemption, Bloomberg News reported. The Wall Street Journal and the Financial Times have other details about Greensill's unsuccessful legal attempt to force credit insurers to maintain coverage.

All of this made me think back to my meeting with Greensill in London in July 2019. He was brimming with confidence then, having just received the first chunk of what would become $1.5 billion in investment from the SoftBank Vision Fund. On his way to London's Farnborough Airport, where a jet was waiting to whisk him to an appointment with Masayoshi Son in Japan, he recounted his concerns about the trade credit insurance industry.

“You can go and pull a very long list of companies that have fallen over and what has precipitated them falling over: Credit insurers changing their mind about capacity,” he told me. “Credit insurers have a nasty tendency to precipitate failures of business by withdrawing the lifeline that supports the financing underneath those businesses.”

To be clear, Greensill wasn't referring to his own company, which at the time was well capitalized and expanding rapidly. Rather he was referring to his reluctance to use credit insurance to underwrite lending to riskier clients, because of his experience of insurers withdrawing such coverage when it was needed most. Greensill is a big buyer of credit insurance for the invoice-backed loans it packages into financial securities. However, most of the cover it purchases is for lending to investment-grade clients.

There's an irony then in Greensill's own downfall being triggered by the very same mechanism: credit insurers getting cold feet. Greensill spotted the vulnerability but failed to realize it could apply to himself. His firm has now sought safe harbor protection under Australia's insolvency laws and is pursuing a quick sale of its operating business to Apollo-backed Athene Holding Ltd. Its value is now a sliver of the $4 billion Softbank once ascribed it.

One can't pin Greensill's demise just on the credit insurance industry. The firm's deeply intertwined relationship with Sanjeev Gupta's debt-funded steel empire was a longstanding worry for regulators and, more recently, for Credit Suisse. SoftBank wrote down substantially the value of its Greensill investment at the end of 2020, suggesting it already realized then its bet on Greensill was a dud. It hasn't explained why.

Credit insurance was, however, a key attraction for investors who parked money in the Credit Suisse funds. It meant they earned a decent yield from the packaged loans while taking little risk. Greensill also relied on insurance to protect the loans held by Greensill Bank, its German banking arm.

The firm's lawyers argued in an Australian court this week that if insurers declined to extend coverage of some 40 companies covering $4.6 billion of assets, Greensill Bank would be “unable to provide further funding for working capital of Greensill's clients,” according to the FT. Some were “likely to become insolvent, defaulting on their existing facilities.”

A common criticism of credit insurance is that it's like buying an umbrella that doesn't open when it rains. For that reason European governments hurried to agree a financial backstop for trade credit insurers last year. They feared that otherwise the insurers would withdraw coverage during the pandemic and trade flows would collapse.

Buying such insurance limited Greensill's direct exposure to credit losses but it's obliged to pay an insurance deductible if an insured client defaults, as has happened several times recently. FTSE-100 listed NMC Health Plc, rent-to-own retailer Brighthouse Ltd. and SoftBank-backed construction company Katerra were among the Greensill clients that got into financial difficulties last year.

Greenhill's 2019 accounts, the most recent available, show its maximum potential loss arising from insurance deductibles was about $1 billion. However, the expected loss in relation to insured client defaults was estimated at less than $60 million. Greensill was modestly profitable that year.

In view of the spate of customer defaults, credit insurers will have developed their own reservations about Greensill. The finance firm ended its relationship with Euler Hermes last year after the German credit insurer demanded a bigger insurance deductible. (Euler Hermes had taken the insurance loss when NMC defaulted.) At the time, Greensill managed to obtain insurance coverage elsewhere. Greensill says its clients didn't incur any losses when Katerra defaulted on a $435 million loan in December. It's not clear to what extent insurers took that hit.

When downgrading Greensill Bank's credit rating last year, Scope Ratings warned that rising insurance costs would have a negative impact on the business. A loss of insurance cover could further imperil the rating, it added at the time.

In hindsight it was imprudent for Greensill to become so dependent on insurers, when its founder knew just how fickle they could be when fair weather turns foul. Greensill's Achilles' heel was hiding in plain sight.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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