Photographer: Markus Hibbeler / Bloomberg
Photographer: Markus Hibbeler / Bloomberg
Long ago Credit Suisse Group AG was forced to phase out a group of $ 10 billion in funds it ran with financier Lex Greensill, there were plenty of red flags.
Bank executives knew early on that much of the assets in the funds were linked to Sanjeev Gupta, a Greensill client whose loans were at the center of a 2018 scandal at rival asset manager GAM Holding AG. They were also aware that much of the insurance coverage the funds relied on depended on one insurer, according to a report. Credit Suisse even conducted an investigation into its funds last year that uncovered potential conflicts of interest but failed to prevent them from collapsing months later.
On Friday, the bank finally pulled the plug, saying it would liquidate the strategy, a group of supply chain funding funds for which Greensill provided the assets and which was held as a success story. The funds, which have about $ 3.7 billion in cash and equivalents, will begin paying back most of that amount next week, leaving about two-thirds of the investor’s money tied up in securities whose value may be uncertain.
The decision ends a dramatic week that began when Credit Suisse froze funds after a major insurer refused to cover new notes for its securities. The movement sent shockwaves around the world, asked Greensill Capital to seek a buyer for its business, and a forced rival GAM Holding AG to enter into a similar strategy. For Credit Suisse and his new Chief Executive Officer Thomas Gottstein, it may be the most damaging reputation damage after an already difficult first year in the lead.
While the financial toll on the bank may be limited, fund investors remain trapped approximately $ 7 billion in a product presented as a relatively safe but more profitable alternative to the money markets.
The Greensill-linked funds were one of the fastest-growing strategies at Credit Suisse’s asset management unit, attracting money from low-return investors in a region struggling with negative interest rates for years. The bank started the first of the funds in 2017, but they really took off in 2019, the year when rival asset manager GAM finished winding down a group of bond funds that had invested much of their money in securities linked to Greensill and one of his early clients, Gupta GFG Alliance.
Credit Suisse funds were also heavily exposed to Gupta in the beginning. As the bank ramped up the strategy, as of April 2018, the flagship supply chain financing had about one-third of its $ 1.1 billion in banknote assets linked to Gupta’s GFG Alliance companies or its clients, an application said.
Credit Suisse executives were aware of it, but at the time denied that it was too great a risk, according to people familiar with the case. They argued that most of the loans were to Gupta clients and not directly to GFG companies, the people said, asking not to be identified because the information is private.
Over time, the share of loans linked to GFG and clients seemed to decline, as new counterparties surfaced in the disclosures of funds packaging loans to multiple borrowers, making it more difficult to determine who is the ultimate counterparty. Many of the vehicles are named after roads and landmarks around Lex Greensill’s birthplace in Australia.
The fund’s executives also knew that much of the insurance coverage they relied on to keep the funds looking safe depended on just one insurer, according to the Wall Street Journal. They considered requiring the funds to get coverage from a wider group of insurers, with no company providing more than 20% of the coverage, but never enacted the policy, the paper said.
A spokesperson for Credit Suisse declined to comment.
Greensill, meanwhile, was looking for new ways to boost the growth of its trade finance empires after the collapse of the GAM funds removed a major buyer from its assets. In 2019 SoftBank Group Corp. intervened, injecting nearly $ 1.5 billion through its Vision Fund to become Greensill’s largest financier. It also made a large investment in Credit Suisse’s supply chain funding funds, investing hundreds of millions of dollars, although the exact timing is not clear.
Over the course of 2019, the flagship fund more than doubled in size, but questions quickly arose about the complicated relationship between Greensill and SoftBank that fueled growth. The funds had an unusual structure in that they used a storage agreement to purchase Greensill Capital’s assets without having a Credit Suisse fund manager conduct an extensive due diligence on them. Within the broad framework established by the funds, the seller of the assets – Greensill – basically decided what to buy the funds.
Credit Suisse initiated an internal investigation that found, among other things, that the funds had provided large amounts of financing to other companies backed by SoftBank’s Vision Fund, giving the impression that SoftBank was using them and its influence on Greensill to support its other investments. . SoftBank withdrew its fund investment – about $ 700 million – and Credit Suisse revised fund guidelines to limit exposure to a single borrower.
Greensill exposure
Credit Suisse’s frozen funds linked to Greensill include SoftBank links
Source: Credit Suisse fund reports, positions as of January 21
Neither Gottstein, nor Eric Varvel, the head of the asset management unit, or Lara Warner, the head of risk and compliance, seemed to see the need for deeper changes. The bank repeated its confidence in the control structure of the asset management unit.
Credit Suisse’s review at the time did not mention that Greensill had also provided funding to one of its other backers, General Atlantic. The private equity firm had invested $ 250 million in Greensill Capital in 2018. The following year, Greensill provided a $ 350 million loan to General Atlantic, with money from the Credit Suisse funds, according to the Wall Street Journal. The loan is currently being refinanced, someone familiar with the matter said.
A General Atlantic spokeswoman declined to comment.
Shortly after the Credit Suisse probe was completed, more red flags surfaced. In Germany, regulator BaFin was looking for a small lender from Bremen who had bought and supported Greensill with money from the SoftBank injection. Greensill was effectively using the bank to stock the assets he had purchased, but BaFin was concerned that too many of those assets were linked to Gupta’s GFG – a risk that Credit Suisse’s executives had previously brushed aside.
SoftBank, meanwhile, began quietly writing off its investment in a stunning reversal from a bet it had made just a year earlier. By the end of last year, it had written off the stake significantly and is considering dropping its valuation to near zero, people familiar with the matter said earlier this month.
Credit Suisse, however, emphasized the success of the funds for investors. Varvel, the head of asset management, cited them in a December 15 presentation as an example of the “innovative” and “higher margin” fixed income products the bank wanted to focus on.
Balance leap
Greensill Bank has grown as its parent company chases supply chains to finance
Source: Greensill Bank annual accounts, German regulator BaFin
By then, Greensill already knew that a little-known Australian insurer called Bond and Credit Company had decided not to renew its policies for $ 4.6 billion in corporate loans that his company had purchased. The policies were set to expire on March 1, prompting a last-ditch effort by the supply chain firm to sue the insurer in Australia. That day, a Sydney judge scrapped Greensill’s order, triggering the chain of events that have since echoed around the world.
Credit Suisse was unaware until recently that the insurance was about to expire, according to an expert.
In an update to investors Tuesday, Credit Suisse said several factors led “cumulatively” to the decision to freeze the funds, and that it was looking for ways to repay cash. But in a twist that could complicate the liquidation of the rest, it also said that Greensill’s German bank was one of the insured parties and plays a role in the claims process, and that that bank was just shut down by BaFin.
Many of the assets in the funds are protected to make them more attractive to investors looking for an alternative to money market funds. Yet the second largest of them, the High Income Fund, does not use insurance. It is also the fund with the least liquidity, with less than 20% of its net assets in cash.
Credit Suisse has said it was not aware of any evidence indicating financial irregularities with the papers issued by Greensill or the underlying companies. The bank still has not said how much of the assets in the funds are linked to Gupta’s GFG Alliance.
– With the help of Melissa Karsh