Lex Greensill (Peter Braig, SMH)
- Billionaire Lex Greensill is racing to save his supply chain finance empire after some of its primary financing steams began running dry.
- Credit Suisse on Monday froze four funds worth nearly $13 billion that had been buying Greensill bonds, helping to destabilise the business.
- As credit insurers look reluctant to renew Greensill's coverage, the company has warned up to 50,000 jobs around the world are at risk if it in turn is forced to stop funding some of its clients.
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A number of Australian companies will face the prospect of insolvency unless watermelon farmer-turned-financier Lex Greensill gets his business affairs in order quickly.
In a quickly developing story emerging this week, it was revealed that Greensill is fighting to keep his supply chain financing empire alive. Given the scale of the business, valued at $6 billion last year, and the labyrinthine nature of its financial affairs, a collapse could lead to a fire sale that would threaten the stability of tens of thousands of jobs globally, and as many as 7,000 locally.
Here's what you need to know.
What is Greensill?
Strictly speaking, Greensill is a supply-chain financing company. In a nutshell, it pays supplier invoices upfront for its clients at a discounted rate. Those clients then pay Greensill the full fee further down the track. Rather than just pocket the margin however, Greensill rolls the debt into investment-grade bonds which are in turn bought as a safe short-term investment.
It has proved a profitable enterprise for its founder, whose personal net worth has been valued at more than $2 billion after SoftBank, the venture capital behind the likes of Uber and WeWork, plowed $US1.5 billion into his company. Not bad for a man who took what he'd learnt running the family's Bundaberg farm and moved into finance.
So what went wrong?
Issues arose this week however with wealth manager Credit Suisse froze four funds that buys the debts Greensill packages up, citing "considerable uncertainty" about the value of some of its holdings.
Without the funds, worth almost $13 billion, Greensill essentially lost access to a key source of finance to keep the wheels turning. Credit Suisse's decision set off alarm bells, as Swiss fund manager GAM began terminating its own relationship with Greensill.
What's the big deal?
With funds not buying Greensill's bonds, its business model suddenly isn't working, with nowhere to on-sell customer debt. It essentially rendered it a financing business without finance.
Less than 24 hours later, reports emerged that Greensill was internally considering filing for insolvency. German financial regulator BaFin meanwhile took over the company's Greensill Bank, based in Bremen.
A statement released from London during the wee hours in Australia provided another update, confirming it was selling "large parts of Greensill's business and its assets under management." While it didn't name the buyer, it's understood to be US giant Apollo Global Management in a deal reportedly worth $128 million.
More than 50,000 jobs hang in the balance
But there's more. As funds have fled the Greensill business, credit insurers are also panicked.
On Tuesday, the Australian courts rejected an injunction sought by Greensill that would have prevented insurers from also pulling out, according to the Financial Times. If they don't renew Greensill's policies, the company told the court that it would be "unable to provide further funding for working capital of Greensill's clients".
It went on to disclose that without capital some of those companies were "likely to become insolvent, defaulting on their existing facilities" which would in turn "trigger further adverse consequences". Plainly, some 50,000 jobs globally, 7,000 of which are based in Australia.
In rejecting the injunction, the judge ruled that insurance issues had been "made clear eight months ago", with Greensill also having undergone a lengthy audit.
Now what?
The alarm bells are now ringing loud and clear for the company, and for those clients and employees who may be hurt as a result. Like the GFC, the saga demonstrates the risks posed in a complex and interconnected financial system, particularly when debt is packaged up and sold down the line.
Greensill said it was looking to conclude the sale to Apollo by the end of this week which could potentially rescue it or at least minimise some of the fallout. It's also seeking insolvency protection in Australia.
While it races to get its affairs in order, thousands of Australians who have never heard of Lex Greensill could now lose their jobs because of him.