A watermelon farmer-turned billionaire is staring down the collapse of his financial empire – and thousands of Aussie jobs hang in the balance.
A watermelon farmer-turned billionaire is staring down the collapse of his financial empire – and thousands of Aussie jobs hang in the balance.

Aussie billionaire’s empire facing collapse

A Bundaberg farmer-turned globetrotting billionaire is this week staring down the collapse of his financial empire - and thousands of Australian jobs could hang in the balance.

Lex Greensill, who famously grew up on Australia's largest sweet potato farm before embarking on a high-flying career in finance, is racing to save his troubled lender Greensill Capital after investment bank Credit Suisse on Monday froze billions of dollars of funding, kicking off an explosive chain of events that has rocked the financial industry.

Greensill Capital is now preparing to file for insolvency, according to the Financial Times and Bloomberg News, and is scrambling to sell off "large parts" of its business to US private equity firm Apollo Global Management.

The deal is reportedly worth $128 million.

That fire sale would all but wipe out Greensill's shareholders, including Japanese giant SoftBank, which poured $US1.5 billion into the company in 2019.

The UK-based firm, which was founded in 2011 and last year was valued at $6 billion, is also in the crosshairs of Germany's financial watchdog, which on Wednesday froze the operations of its Bremen-based subsidiary Greensill Bank citing an "imminent risk" of over-indebtedness.

The Financial Times further reported on Wednesday that BaFin, the German regulator, had filed a criminal complaint against Greensill Bank's management for alleged balance sheet manipulation - a crime punishable with up to three years in jail.

In its statement announcing it was freezing operations of Greensill Bank, BaFin expressed concern about alleged accounting irregularities, including in dealings with the GFG Alliance Group, headed by Indian-British billionaire Sanjeev Gupta.

"During a special forensic audit, Bafin found that Greensill Bank AG was unable to provide evidence of the existence of receivables in its balance sheet that it had purchased from the GFG Alliance Group," BaFin said.

WHAT IS GREENSILL CAPITAL?

Greensill Capital, as its bread and butter, is a supply chain finance company.

Its clients, until recently, included large corporations like Telstra, Vodafone in the UK, Australian construction giant CIMIC and the UK's National Health Service.

Supply chain finance is a way for large businesses to effectively offer an alternative payment option for their suppliers.

A large company such as Telstra will offer a supplier the option - in this case via Greensill - to receive payment earlier, at the cost of a slight discount on the face value of the invoice.

It's up to the supplier to decide whether it's more valuable to them to get paid in say, one week, or rather wait in some cases up to 90 days to receive the full value of the invoice.

As any small business owner knows, payment deadlines are a major issue.

Waiting up to three months to get paid after supplying goods or services can put major strain on cashflow. Rather than having to borrow money on their credit card to keep the business ticking over, the supplier may decide they're better off paying a small fee to get paid immediately.

"My parents couldn't afford to send me to university because we had to wait a long time for big retailers to pay us," the 44-year-old told the UK's Sunday Times in a 2018 interview. "That caused me early on to have a focus on how that could be fixed."

As a middleman, Greensill purchases the invoice from the supplier, and in turn receives the full invoice amount from, in this example Telstra, at an agreed point in the future.

Greensill purchased $140 billion worth of invoices last year.

Or to put it another way, the company lent that money to its clients, the large corporations.

The benefit for a company like Telstra is that typically the supply chain finance company will agree to extend the payment term, say from 30 days to 60 days, giving it more flexibility over its balance sheet.

But rather than simply taking its cut from the margin, Greensill then took those repayment agreements and "securitised" the debt, turning it into bonds which it then sold as financial products.

This was Greensill's major source of funding.

Why, you might ask, would anyone buy them? Because in theory they're considered a safe, short-term investment, since the companies on the hook to cough up the money are generally big, creditworthy players.

 

Lex Greensill on one of the Greensill farms in Bundaberg. Picture: Paul Beutel
Lex Greensill on one of the Greensill farms in Bundaberg. Picture: Paul Beutel

 

WHAT WENT WRONG?

Things came unstuck this week when Credit Suisse, which had been hoovering up Greensill's debt packages to the tune of $US10 billion and selling them to pensions, rich clients and others, froze its supply chain finance funds citing "considerable uncertainties with respect to their accurate valuation".

Swiss asset manager GAM Holding, Greensill's other major source of funding, also pulled the plug this week.

Credit Suisse's decision on Monday came the same day Greensill's credit insurance providers allowed policies covering more than $US4 billion in assets to lapse, The Wall Street Journal reported.

Greensill had obtained credit insurance to ensure investors holding its debt packages would be paid out in the event one of the underlying customers defaulted on a payment.

But as early as July last year, Greensill's insurers had informed the company they had no intention of extending the coverage past March 1 this year.

Incredibly, the company only sought legal advice about its position last week.

Greensill went to the NSW Supreme Court asking for an emergency injunction that would have extended its insurance coverage.

Barrister Ruth Higgins SC told the court Greensill faced "catastrophic" consequences if the policies were not renewed. "Greensill Bank will be unable to provide further funding for working capital of Greensill's clients," she said in an affidavit.

"In the absence of that funding, some of Greensill's clients are likely to become insolvent, defaulting on their existing facilities. That, in turn, may trigger further adverse consequences on third parties, including the employees of Greensill's clients. Greensill estimates that over 50,000 jobs including over 7000 in Australia may be at risk."

It was not immediately clear which Australian companies are at risk of insolvency.

The court rejected the application, chiding Greensill for waiting to seek relief "within hours of cover expiring", "despite the fact that the underwriters' position was made clear eight months ago".

While the request for an emergency injunction was denied, Greensill will return to court to argue the matter on Friday.

GREENSILL RESPONDS

In a statement regarding allegations of criminality at Greensill Bank, a spokesman said "as a matter of practice, Greensill Bank seeks external legal and audit advice before booking any new asset".

"Greensill Bank began booking future receivables assets in June 2019," he said.

"The Bank's management and risk committee received extensive advice from leading German and UK law firms which informed the way in which the assets were classified. Our auditors reviewed and approved that classification at that time and in their subsequent audits.

"In late 2019 and early 2020 the German deposit protection scheme (Prüfungsverband deutscher Banken) further reviewed all the banks' assets and raised no objections.

"In late 2020 and early 2021 the BaFin advised that they did not agree with the way the assets were classified by Greensill Bank and directed that they be changed.

"In accordance with Bafin's request, Greensill Bank immediately complied and changed the way the assets are classified.

"For the avoidance of doubt, Greensill Bank has at all times been transparent with its regulators and auditors about its approach to classifying assets and the methodologies for determining such classifications.

"This afternoon BaFin issued a six-week moratorium on Greensill Bank."

On the reported sale to Apollo Global Management, the spokesman confirmed a deal was in the works but did not name the company.

"Greensill confirms that it has entered a period of exclusivity with a leading global financial institution with a view to concluding a transaction with them this week," he said.

"This transaction is expected to include large parts of Greensill's business and its assets under management. The structure of the new business is still being determined and as soon as we have clarity on this, we will be able to communicate the impact of these changes on roles.

"We expect the transaction to ensure the majority of our clients will continue to be funded in the same way as they currently are."

frank.chung@news.com.au

 

Originally published as Aussie billionaire's empire facing collapse



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