Credit Suisse’s Greensill Funds Strayed From Tame Invoice Loans

Credit Suisse Group AG marketed its popular supply chain finance funds as among the safest investments it offered, because the loans they held were backed by invoices that would be paid in a matter of weeks.

But as the funds grew into a $10 billion strategy, they strayed from that pitch and much of the money was lent through Greensill Capital against expected future invoices, for sales that were merely predicted, according to people with knowledge of the matter. Now, investors in the frozen funds are left facing the potential of steep losses as the assets are liquidated.

The suspension of the strategy this month, amid uncertainties about the value of the assets, has kicked off a chain reaction across the globe that forced Greensill Capital to file for insolvency and could cost thousands of jobs at companies it financed. For Credit Suisse and Chief Executive Officer Thomas Gottstein, who only last year ordered a probe into the funds that subsequently failed to prevent their collapse, the reputational hit is only just beginning to unfold as clients wait for their money.

The Greensill-linked funds were among the fastest-growing at Credit Suisse’s asset management unit, attracting money from yield-starved investors seeking alternatives to money markets, in a region that has to contend with negative interest rates. They offered “stable and uncorrelated returns” by investing in “buyer-confirmed trade receivables / buyer payment undertakings, supplier payment undertakings and account receivables,” according to fund documents.

Credit Suisse rated the flagship fund the safest on a scale of one to seven, in part because many of the assets were insured. A high-octane version of the fund that didn’t use insurance was given the second-safest rating in investor documents.

Receivables financing is viewed as relatively safe because it simply relies on waiting on a company to pay for goods already received. Greensill also offered what it called “future accounts receivable” financing and touted its ability to project what revenue would come in. But such lending has a far different risk level and typically carries much higher interest rates to compensate for the chance that future business fails to pan out.

People with direct knowledge of the funds and their holdings said that while the money pools initially invested only in receivables backed by actual sales, they increasingly shifted to predictions of future revenue as the strategy -- and Greensill Capital -- swelled in size.

“Mixing these two types of assets in one fund,” said Michiel Steeman, a professor specializing in supply chain finance at the Windesheim University of Applied Sciences in the Netherlands, “should never have happened because you’re trying to sell something under a different name.”

While traditional supply chain finance funds can be viewed “like a money market fund,” he said, “the moment you start to mix that with all the future receivables over the next decade, then it loses all the characteristics of the money market fund.”

Warehousing Agreement

It’s not clear whether the shift to potentially riskier financings violated the funds’ mandate. Fund disclosures made it difficult for investors to track the counterparties that had borrowed from the fund, because the loans in recent years were increasingly moved into vehicles named after roads and landmarks near Lex Greensill’s hometown in Australia.

Crucially, the bank allowed Greensill Capital, which sourced the loans and packaged them for sale, to funnel those notes to the funds through a so-called warehousing agreement, as long as they met certain broad guidelines. The fund documents explicitly state that the portfolio managers “will therefore not exercise discretionary investment management powers in respect of the notes.”

Credit Suisse’s Greensill Funds Strayed From Tame Invoice Loans

A large part of the riskier financings involved companies linked to Sanjeev Gupta’s GFG Alliance, whose steel empire is now trying to stave off default after losing its main source of funding. Others were to companies backed by Masayoshi Son’s SoftBank Vision Fund, which had also invested in Greensill Capital and the Credit Suisse funds, according to the people.

Officials for Credit Suisse, Greensill, GFG and SoftBank declined to comment.

Gupta had been a major client for Greensill early on, and a lot of the assets Greensill Capital sourced from companies tied to GFG ended up in the Credit Suisse funds. In April 2018, as the bank was still ramping up the supply-chain finance strategy, the flagship fund had about a third of its $1.1 billion in notes linked to Gupta’s GFG Alliance companies or his customers.

While the overall concentration has come down, at least $1 billion of the assets in all four funds are now tied to Gupta’s GFG, said the people. Across Lex Greensill’s firms, the exposure to Gupta was about $5 billion at the time the financier’s company filed for insolvency, they said.

In court documents dated March 8, Lex Greensill said that GFG was “heavily dependent” on financing provided by Greensill Capital, “particularly finance through the future accounts receivables programmes.”

BaFin’s Probe

While part of the receivables Greensill Capital purchased from higher-risk companies such as GFG were insured, Credit Suisse decided to freeze the funds after a major insurer refused to renew coverage. It’s not clear whether the existing coverage will pay out, after the company -- Japan’s Tokio Marine Holdings Inc. -- questioned the validity of the contracts.

Investors in the funds hadn’t been told about the risk that some of the insurance was about to lapse, according to Edouard Fremault, a partner at Deminor in Brussels, a firm that funds investment-recovery litigation.

Greensill loans to GFG-linked companies were also at the center of an investigation into Greensill Bank that German regulator BaFin has been conducting since the middle of last year. Greensill Bank, a Bremen-based lender, had been capitalized with money from a SoftBank investment and Greensill was using it as another vehicle to extend loans and warehouse them. BaFin had become worried that too many of those were tied to Gupta.

Last week, the regulator said that Greensill Bank “was unable to provide evidence of the existence of receivables in its balance sheet that it had purchased from the GFG Alliance Group.” BaFin has asked prosecutors in the city of Bremen to investigate the bank.

Credit Suisse’s Greensill Funds Strayed From Tame Invoice Loans

Credit Suisse hasn’t commented on how much money in the funds was linked to GFG and its customers. But the bank last year changed the fund guidelines to limit how much exposure they can have to a single borrower, after an internal probe into potential conflicts of interest involving another key backer of Greensill, the SoftBank Vision Fund.

SoftBank had invested about $1.5 billion in Greensill Capital in 2019 to become its largest outside backer. It also put hundreds of millions of dollars into the Credit Suisse funds that Greensill ran. The funds, in turn, had extended a large amount of financing to companies in which the Vision Fund also held an equity stake.

Despite the change in the rule and the fact that SoftBank was forced to pull its fund investment -- about $700 million in total -- the Credit Suisse supply chain finance funds had at least $629 million in assets tied to SoftBank-backed companies as of late January.

Among them are hotel group Oyo and China’s Guazi. The two had at least $363 million of receivables outstanding in the funds, according to filings. The bulk of these loans weren’t backed by actual sales, people familiar with the matter said.

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