Long before Greensill was imploded, Credit Suisse saw danger

Credit Suisse in 2019 considered a rule that would require the funds to get coverage from a wider range of insurers, but never put it in place, according to the people familiar with the funds.

The concentration grew and grew until, at one point, insurers protected 75% of the portfolio. Last summer, prime insurer Tokio Marine Holdings Inc. and the others Greensill that they would not continue to provide coverage, court documents say.

The insurance was crucial because it made Greensill’s assets safer for Credit Suisse’s institutional investors, some of whom are not allowed to put money into riskier investments.

Without insurance, Credit Suisse suspended its $ 10 billion supply chain funding funds Monday, draining a major source of funding for Greensill. Greensill plans to file for insolvency in the UK this week and is in talks to sell its business to Apollo Global Management Inc. for a fraction of its peak rating.

The developments mean a blow to Credit Suisse Chief Executive Thomas Gottstein, who said he wanted 2021 to be a clean slate following a damaging espionage scandal and one-off allegations that dent the bank’s financial results and reputation.

The four suspended funds invested exclusively in securities created by Greensill, which specializes in supply chain financing, a type of short-term cash advance to companies to extend the time they have to pay their bills.

Founded by banker Lex Greensill, the company described itself as a technology startup competing with traditional banks such as Citigroup Inc. and JPMorgan Chase & Co. It owns a small bank in Bremen, Germany, which regulators shut down on Wednesday.

Mr. Greensill was born in Australia and grew up on a sweet potato, sugar cane and watermelon farm before moving to London to pursue a banking career. He worked at Morgan Stanley and Citigroup and started Greensill in 2011, drawing on a network of financial and political connections. He signed former British Prime Minister David Cameron as an adviser.

Prince Charles bestowed the honorary title of Commander of the British Empire on Mr. Greensill for his services to the economy. To transport it between Australia, Germany and London, Greensill Capital maintained a fleet of private jets.

Greensill’s goal was to provide supply chain financing to companies that had fallen under the radar of traditional banks that favored larger, more established clients.

The Vision Fund of SoftBank Group Corp. plowed in $ 1.5 billion in 2019, giving Greensill a valuation of $ 4 billion. The Vision Fund is expected to write off its entire investment, The Wall Street Journal reported this week, citing a person familiar with the matter.

Supply chain financing has been around for decades, but gained traction after the financial crisis as a way for companies to borrow effectively to pay their bills, even though the accounting rules do not classify the transactions as traditional debt.

In a typical supply chain financing arrangement, Greensill pays a company’s suppliers earlier than they would normally expect, but at a discount. The company then pays Greensill the full amount. The supplier is paid early, the company has more flexibility over its cash and Greensill is left with a small profit.

Clients included blue chip borrowers such as Ford Motor Co. and government agencies such as the New Jersey Department of Transportation. They also include start-ups and those considered to be higher risk borrowers.

Greensill used his German bank to finance a number of deals. But instead of keeping the cash advances – which are typically renewed every 60 or 120 days – on the balance sheet like a traditional bank, it converted most of them into bond-like securities or notes.

The Credit Suisse funds were major buyers of the notes and essentially served as an off-balance sheet financing for Greensill.

Credit Suisse launched its first Greensill fund in 2017. Eric Varvel, the bank’s head of asset management, spoke about it in a glossy client magazine with an interview with Mr Greensill.

“The short term and insurance coverage of the underlying bonds is also attractive,” said Mr. Greensill.

The main buyers were insurance companies and pension funds, according to people familiar with the funds, in addition to some of Credit Suisse’s wealthy private banking clients. According to the bank, at the time the funds were frozen, there were more than 1,000 such investors.

Credit Suisse fact sheets given to investors rated the funds as 1 or 2 on a scale of 1 to 7, with 1 being the safest. The larger funds that held onto investment-grade borrowers aimed for returns between 0.8% and 1.5% above the benchmark in the short term. A smaller, riskier, high-income fund aimed for a gain of 3.5% above those benchmarks.

Investors could withdraw money on a weekly or monthly basis, depending on the fund, and had to withdraw their money five or ten days in advance.

Among the borrowers of the funds was British steel magnate Sanjeev Gupta. German regulators cited irregularities related to Mr Gupta’s activities when they took control of Greensill Bank this week. Some of the funding provided to him by the Credit Suisse funds was covered by insurance, according to fund documents sent to investors.

As government bond yields shrank or turned negative, the funds gained traction with investors.

By the summer of 2019, funds had grown to $ 4 billion. Executives in Credit Suisse’s asset management unit planned a new rule that would require Greensill to diversify sources of insurance coverage, according to the emails from Credit Suisse reviewed by the Journal and those familiar with the funds.

No insurer would cover more than 20% of the assets in the fund. That way the entire fund wouldn’t collapse if there was a dispute or one withdrawn.

At the time, Bond and Credit Co., part of Insurance Australia Group Ltd., an organization backed by Warren Buffett’s Berkshire Hathaway Inc., provided about 40% of the coverage for the largest of the four Credit Suisse funds, the fund said. documents.

Insurance Australia sold Bond and Credit to Japanese insurer Tokio Marine, while retaining some coverage that was slowly scaling down. By April 2020, the policy written by Bond and Credit had grown to 51% of Greensill’s coverage.

The manager of the Credit Suisse funds, Lukas Haas, and one of his superiors, Luc Mathys, head of fixed-income asset management, were involved in the decision not to introduce the 20% cap, according to people familiar with their way of thinking. time. They became confident that trade credit insurance wouldn’t be hard for Greensill to find if an insurer pulled out, the people said.

The concentration risk increased. According to the fund documents, by June 2020, 75% of coverage came from Tokio Marine, its Bond and Credit unit, or its runoff Insurance Australia policies.

Meanwhile, Tokio Marine’s hunger to provide cover for Greensill waned. In July 2020, Tokio Marine wrote to Greensill’s insurance brokers that, according to court documents, the company had no plans to extend its coverage. Among other things, it said that a Bond and Credit employee had acted outside of his authority regarding the renewal of the original policies, the documents said.

In September, Tokio Marine told Greensill that coverage for new contracts would end on March 1. The change would affect 40 of Greensill’s customers, who generated $ 4.6 billion in supply chain funding.

In the same month, Mr. Gottstein launched a $ 476 billion strategy review of Credit Suisse’s asset management division. It stopped underperforming funds and written off a stake in investment manager York Capital Management by $ 450 million.

The supply chain funds were protected. Mr. Varvel presented them to shareholders on an investor day in December as an example of Credit Suisse’s competitive advantage. At the same event, Mr. Gottstein said he wanted to address issues where they occur at the bank and “avoid surprises”.

Credit Suisse had provided a $ 140 million bridge loan to Greensill that fall, while helping the startup raise new capital from outside investors. According to people familiar with the loan, the loan was signed by senior executive committees within the bank. The loan has not been repaid.

Greensill’s ability to purchase trade credit insurance continued to diminish. Another lender, Euler Hermes Group SA, suggested tougher terms for its policy, which would reduce Greensill in a claim, according to people familiar with the case.

Greensill rejected the terms and chose to replace Euler, a Greensill spokesman said in October.

It could not turn to American International Group Inc., which ended its partnership with Greensill in 2017 after a disagreement over a policy, according to people familiar with the matter. A Greensill spokesman said in October that there was no litigation and that it had found a new insurance relationship to get better pricing terms. An AIG spokesperson declined to comment.

With no new policies in place, Greensill prepared in late February to sue Tokio Marine and the other insurers in the Supreme Court of New South Wales in Australia to enforce their policies.

The judge dismissed Greensill’s claim on March 1, noting that Tokio Marine and the others had warned Greensill of their position “since mid-last year.”

—Alice Uribe contributed to this article.

Write to Duncan Mavin at [email protected], Julie Steinberg at [email protected] and Margot Patrick at [email protected]