Hedge Fund Shorts Credit Suisse on Frozen Greensill Funds
(Bloomberg) -- An Australian hedge fund is betting against Credit Suisse Group AG, expecting the Swiss lender may end up having to compensate clients for losses tied to billions of dollars invested in funds it ran with embattled financier Lex Greensill.
John Hempton, the co-founder and chief investment officer of Bronte Capital Management Pty, said in an interview Tuesday that he’d placed a “reasonable-sized short” last week, mainly against Credit Suisse. Known for bets against Wirecard AG and Valeant Pharmaceuticals International Inc., Hempton is also wagering on declines in Japanese insurance giant Tokio Marine Holdings Inc. and Insurance Australia Group Ltd. -- the two firms that had provided default cover for loans made by Greensill’s eponymous company.
Credit Suisse pulled the plug on a $10 billion suite of funds for which Greensill provided assets after the Japanese firm triggered a rapid loss of confidence among investors by deciding against renewing insurance on the Greensill loans. The debacle is the biggest reputational hit for Credit Suisse Chief Executive Officer Thomas Gottstein since he took charge last year.
Hempton argues the damage may run deeper. In a blog post this week, he highlighted that clients in at least one of the Credit Suisse funds were told the underlying risk was covered by highly-rated insurers. It’s possible the insurers “will duck much of the liability to make good Greensill losses,” he wrote, depending on when their policies were written and how they are worded.
“One of these companies is a loser,” said Hempton, who has about A$1 billion ($770 million) in assets under management. “My personal view at this point is it’s likely Credit Suisse, and the reason it’s likely to be Credit Suisse is because the insurers worked out what was going on in April, June last year and have not renewed the policies.”
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Credit Suisse declined to comment.
The Swiss lender has started an internal probe into the collapse of the $10 billion group of supply chain finance funds and temporarily replaced three employees in its asset management unit who were tied to the strategy. It has said that uncertainty about the valuation of some investments and the reduced access to insurance for new investments prompted their wind down. Many assets in the funds have protection, though the High Income Fund doesn’t use insurance.
Credit Suisse risks a backlash from investors set to face potential losses after it was forced to freeze the Luxembourg funds, according to a company that funds investment-recovery litigation. The bank continued to market the biggest of the funds as a fully insured, low-risk product despite a decision by insurers last summer not to renew coverage, said Edouard Fremault, a partner at Deminor in Brussels. He said his firm has already been approached by around 10 investors risking losses of about 60% and is reviewing options including potential lawsuits.
On Wednesday, Tokio Marine said it was examining the validity of contracts at the root of the Greensill collapse, and that it would stick with its profit guidance for the current fiscal ending March 31 after reviewing the dealings of its Australian unit Bond & Credit Co.
Greensill’s stunning fall in a matter of days was set in motion by BCC’s decision last year not to renew policies covering billions of dollars of loans the supply chain finance firm made. Protection against default on some $4.6 billion in credit lapsed this month after a futile effort by Greensill to get an injunction to keep it going, court documents show.
Australian insurer IAG has said it has no net exposure to trade credit policies sold to Greensill entities after offloading its stake in BCC to Tokio Marine in 2019 and getting extensive reinsurance cover. A representative declined to comment further.
Shares of Credit Suisse have fallen 1.7% this month, while Australia’s IAG has dropped 9%. Tokio Marine has climbed 6%.
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Since co-founding Bronte in 2009, Hempton has developed a reputation for quirky stock research and a focus on sniffing out fraud. He rose to prominence for bearish bets on Chinese companies that had listed in North America, and squared off against billionaire investor Bill Ackman with his wager against Valeant.
He was too early to Wirecard though, losing Bronte money over a decade in which shares of the disgraced German technology firm soared.
Hempton said if Tokio Marine and IAG are able to avoid absorbing losses stemming from the Greensill loans, attention could turn to the Zurich-based lender, which had told clients its investments were insured. These questions will likely be settled in court, he said.
“There is a very big bag here, we don’t know how big or who’s holding,” said Hempton. “The only certain winners here are lawyers, lots of lawyers.”
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