As with AIG in 2008, once again it is insurance — the supposedly sober, even sleepy, side of finance — that is key to understanding the Greensill crisis.
In supply chain finance, a large company such as Vodafone would tell its suppliers that, rather than wait weeks for their invoices to be paid by the telecoms group, they could get much faster payment from Greensill Capital, at a small discount.
Greensill would pay the supplier and later accept a slightly larger payment from Vodafone. The supplier was paid more quickly, Vodafone was able to smooth out its payments, Greensill collected a small margin.
This effectively created a loan from Greensill to Vodafone. And to keep the machine running, Greensill would sell off the loan so it had capacity to write more. The major customer of the loans was Credit Suisse, which put them into funds sold to outside investors. Until this week.
Credit Suisse suddenly announced on Monday it was freezing the funds. The reason? A lapse in the insurance covering the credit, which had allowed investors to treat the fund as almost risk-free — almost as safe as cash in the bank but with a slightly better return.
As Greensill’s lawyer put it this week, the insurance “allows Greensill to access sources and levels of funding which it would not otherwise be able to access and which are critical sources of financing for its business”.
Just as AIG was counterparty to global banks over credit default swaps in 2008 and Berkshire Hathaway was counterparty to Deutsche Bank over leveraged super senior trades in 2009, Greensill’s insurers held a vital role in a complex financial trade.
Without them, the machine was stuck. Greensill could not offload loans and so it could not write new ones. This is inconvenient for blue-chip customers such as Vodafone. It is potentially devastating for lesser companies such as those associated with Sanjeev Gupta, the metals magnate, that are among Greensill’s biggest borrowers.
For at least four months, Greensill has used a well-known broker, Marsh, to try to find alternative insurers, court papers show. None has been willing to step in.
This week, Greensill took the desperate step of suing its existing insurers — BCC Trade Credit, Tokio Marine and Insurance Australia — in an attempt to force them to restore coverage.
Greensill told an Australian court on Monday that should the policies not be extended, Greensill’s “economic viability would immediately and seriously be impaired as its primary sources of funding, and revenue, would immediately cease”.
Moreover, Greensill said it had “been informed by a number of clients” that the loss of insurance “would most likely cause them to become insolvent”. Those clients would default on their Greensill obligations and Greensill’s investors would withdraw their support.
A judge ruled against Greensill and the insurance was not restored.
Why did the insurers pull coverage? Court documents show that the main original policy was written by The Bond & Credit Company, an Australian insurer acquired in 2019 by Japan-based Tokio Marine.
The insurance group wrote to Greensill in July last year to say that the underwriter in charge of the account had been dismissed as he had been found to be insuring amounts to Greensill “in excess of his delegated authority”, with the total exceeding A$10bn ($7.7bn).
The group added that it had begun an investigation “in relation to the dealings between Greensill Capital and [the underwriter]”, including other areas “where he has acted outside the scope of his delegated authority”. As it continued its investigation, it asked Greensill for more documents, including “any guarantee provided by SoftBank”.
SoftBank’s Vision Fund owns a stake in Greensill. The Vision Fund’s other portfolio companies, such as Indian hotels group Oyo, also use Greensill to pay suppliers. And, finally, as the Financial Times revealed last June, SoftBank had also poured more than $500m into the Credit Suisse funds, essentially using its own finance company to lend to its own portfolio companies and then investing in that debt itself.
Whatever specific development alarmed Tokio Marine last summer, its decision to stop coverage — unknown to the wider world — spelt the end.
In July, the insurance group wrote to Marsh: “Given the current situation, we will not be able to bind any new policies, take on any additional risk nor extend or renew any Greensil [sic] policy past what had previously been agreed. Please take this statement as a blanket answer for any requests from Greensil to look at additional limit coverage, maximum limit capacity or timeframe of a policy period.”
Greensill refused to accept the decision, but its air of finality was unmistakable.
Reporting by Jamie Smyth in Sydney, Robert Smith and Arash Massoudi in London