GFG Alliance Financier Greensill Capital Goes into Administration
Financial Times reported that warning it is in severe financial distress, unable to repay a USD 140 million loan to Credit Suisse and hit by defaults from its
Financial Times reported that warning it is in severe financial distress, unable to repay a USD 140 million loan to Credit Suisse and hit by defaults from its key customer GFG Alliance, Greensill Capital has filed for administration marking the latest stage of the unravelling of a SoftBank backed company that had sought a USD 7 billion valuation last year, with operations that extend from the UK to Australia. Greensill, which specialises in supply chain finance where businesses borrow money to pay their suppliers, was thrown into crisis last week after its main insurer Japanese behemoth Tokio Marine Holding’s Bond & Credit Company refused to renew a USD 4.6 billion contract and Credit Suisse froze USD 10 billion of funds linked to the firm, depriving it of an important source of funding. Lawyers for Greensill appeared before a UK court and said that “Loss of insurance contract caused the real crunch and about USD 5 billion of exposure to Mr Sanjeev Gupta’s GFG Alliance group of companies, which is currently experiencing financial difficulties and has started to default on obligations to Greensill. Credit Suisse, citing events of default, had demanded repayment of a USD 140 million loan it provided to Greensill in October. Greensill has no conceivable way of repaying it.”
A spokesperson for Greensill’s administrators Grant Thornton said that the joint administrators are in continued discussion with an interested party in relation to the purchase of certain Greensill Capital assets. According to the court documents US’s private equity firm Apollo Global Management, the only credible bidder, has made a USD 59.5 million cash offer for Greensill’s intellectual property and IT systems that would involve it taking on the majority of the more than 500 employees of its UK business Greensill Capital Management Company. However, people familiar with the matter said that Apollo would not take on any financing for GFG
According to court documents, GFG said in a letter on February 7 that if Greensill stopped providing it with working capital, it would collapse into insolvency. GFG’s collapse would put tens of thousands of steel and engineering jobs at risk, spanning 30 countries, including the UK, France, Australia and the US. GFG employs 35,000 people worldwide. In the UK, it is the third largest steel producer, employing about 3,000 people, with a further 2,000 employed in engineering and manufacturing.
Business secretary Mr Kwasi Kwarteng held an emergency meeting on Sunday with Liberty Steel CEO Mr Jon Ferriman. A government spokesperson said “The government has put together a far-reaching package of support to help businesses and workers through the coronavirus pandemic. We continue to regularly engage with businesses across all sectors, including those in the steel industry.”
UK’s Labour shadow minister for business and consumer Ms Lucy Powell said "This is a deeply concerning situation, and a very worrying time for Liberty Steel workers. It's vital that the Government acts with the urgency required and doesn't wash their hands of the situation. As we've argued through the pandemic, the Government should do more to support British steel and the UK manufacturers who are their customers. Instead they have been ignored, without even one reference in the Budget, threatening jobs and weakening the foundations of our economy."
Union officials are due to meet Mr Gupta on Tuesday to seek assurances over the future of the businesses. A spokesperson for the Community steel union said “Sanjeev Gupta needs to tell us exactly what the administration means for Liberty’s UK businesses and how he plans to protect jobs. The future of Liberty’s strategic steel assets must be secured and we are ready to work with all stakeholders to find a solution.”
A GFG spokesperson said “Our operations are running as normal and our core businesses continue to benefit from strong market conditions generating robust sales and cashflows. GFG Alliance has adequate current funds and its plans to bring in fresh capital through refinancing are progressing well.”
Greensill crisis surfaced when British Business Bank informed Greensill that it is removing a taxpayer guarantee following an investigation into compliance with the rules of the Coronavirus Large Business Interruption Loan Scheme. Accountancy firm EY and the law firm Hogan Lovells had been drafted in by the government to assess whether Greensill was in breach of the CLBILS rules. The crisis at the troubled lender Greensill Capital has spread further after German regulators banned its German subsidiary Greensill Bank from doing business and reportedly filed a criminal complaint against management. The crisis at Greensill has also triggered alerts at the Bank of England and the European Central Bank. The BoE’s Prudential Regulation Authority, which is in charge of monitoring financial stability in the UK, has asked banks to reveal how much of their business is linked to Greensill or GFG Alliance. The Bank of England has forced GFG Alliance to inject about GBP 75 million into Wyelands Bank, a lender in which Gupta is a shareholder. It is understood that the regulator’s decision followed longstanding concerns about the bank’s business model. Wyelands will use the money to return cash to its almost 15,000 savers in Britain
However, the collapse of Greensill will set alarm bells ringing as its business has echoes of the Collateralised Debt Obligations that were said to be behind the financial crash in the first decade of the current century, except in this case instead of parcelling up mortgages and selling them on Greensill buys up invoices and securitises them. From a supplier’s perspective, the practice of accepting a small haircut on the money it is owed by a customer in return for immediate payment makes sense in terms of alleviating cash flow problems; however, it can also disguise rising levels of debt because accountants do not treat supply chain finance deals as debt.
Also, Mr Gupta’s steel asset buying spree is likely to stop, at least in short term after German steel giant thyssenkrupp last month had ended talks on a possible acquisition of thyssenkrupp Steel Europe by Liberty Steel