Clarissa Dann Welcome to Trade Finance TV in semi-lockdown. I’m your presenter Clarissa Dann, and with me in the studio today, we have Michael Sugirin (Global Head of Open Account Trade, Standard Chartered Bank, SIngapore), Christian Hausherr (Chair, Global Supply Chain Finance Forum), and Sean Edwards (Chair, International Trade and Forfaiting Association), to reflect on the collapse of Greensill Capital. Gentlemen, welcome to the show.
Michael Sugirin Thank you.
Christian Hausherr Thank you very much, Clarissa.
Sean Edwards Pleasure to be here. Thanks Clarissa.
Clarissa Dann Those Greensill headlines don’t half keep on coming do they, but this wasn’t really supply chain finance, was it?
Sean Edwards It was and it wasn’t. So Greensill Capital had some very traditional business which a lot of the banks, such as the one I worked for and others invested in, and that was safe, that was traditional. It wasn’t particularly high yield. There were some interesting innovations, but it wasn’t terribly sexy, if you like, or terribly radical.
You then have the other part, which is the bit that really brought them down, and that was the fund’s work, and it’s not clear even now exactly what was in those funds. Those were meant to be reverse factory and supply chain assets, but it seems that there may have been other assets in there, such as these, now notorious future receivables. And really the Achilles heel of those funds was the fact that, although they invested in non-investment grade names, they were elevated to investment grade for the use of credit insurance. And it was the withdrawal of the credit insurance that actually brought down the funds, and eventually Greensill itself, because it was really nothing else that was worth selling in the traditional business.
Michael Sugirin It felt very much like 2008 during the days of asset-backed securitization, right, in terms of what happened during the GFC. At the core, we had some very good client portfolios, highly concentrated, but there was also other aspects of supply chain finance in there. And some of it, as Sean mentioned, were actually not the traditional definition of supply chain finance, which we can sort as incorrect accounting of assets.
Also, the other element, clearly the misuse of big data or data itself to be able to define what is an irrevocable payment undertaking. I think Grensill sort of called this a data-driven IPU and clearly being able to talk about future receivables, but not really understanding if the trade has actually been delivered. So that is clearly a no-no when you talk about the classic sense of supply chain finance.
Clarissa Dann Those are practical definitions, aren’t they, Christian?
Christian Hausherr Absolutely. So I would say there are two dimensions that deserve special attention here. One is the adherence to the industry definitions that have been agreed and published by the Global Supply Chain Finance Forum, and secondly, the due diligence on the client and its trading parties. So these two dimensions were, I would say, grossly disobeyed. We might even say violated. The client risk was too high. It was too clustered. There were financing structures behind industry recommendations. And as Michael already alluded to, there were even some receivables that did not even exist. So this is definitely beyond industry recommendations and definitions, and this is the consequence.
Clarissa Dann So in a word, innovation going a bit off-piste, would you agree, gents?
Sean Edwards There was innovation in the traditional product, and I think people admired Greensill for that, actually. And that’s a model that’s being replicated by a lot of people. So using the sort of multi-cell securitization vehicles. The point is, they really pushed that cutting edge technology. Now when the mask came off and actually they were looking to sell the company, it turns out that really there was only a third party platform in there.
I think a lot of the technology that they talked about in terms of sort of predictive analytics and they talked about hiring a lot of data scientists and so on. A lot of that, I think, was related to the future receivables business, which has probably benn mis-accounted for, it looks like. In Germany, that’s probably the reason that baffled the investigated Greensill Bank, but we don’t know 100%. So it’s more of a Fin rather than a Tech, and in the Fin area, it was more of an arranger I think, so you’ve gotta keep it in context,
Clarissa Dann How on earth do you get the balance right between safety and getting liquidity out to those that need it?
Michael Sugirin there definitely needs to be an aspect of better transparency around some of these programs and how these corporates are essentially booking these programs on their balance sheet itself. And I think there’s a lot of good work that is happening in the background. Also important is the aspect of data; Sean talked about future receivables, right? There’s definitely a good part to data, and we can definitely use data to understand better performance risk, and have a better visibility in terms of certain risk asset classes. But we shouldn’t use data to create obscure vehicles or obscure underlyings that doesn’t really exist. We know now that, that sort of stuff really drags down the entire industry. There’s a lot of good in terms of supply chain finance, right. If I think about where where we are as a bank operating, especially in a lot of the countries where the supply chains exist, this type of financing is absolutely required.
Sean Edwards One of the things we shouldn’t forget is that the industry talks a lot about SME financing. And actually, Greensill was doing SME financing. Now, the problem was that the investors who funded that didn’t sort of know that, that’s really what they were getting in to, through the sort of effect of the credit insurance.
Clarissa Dann it doesn’t seem that long since the ratings agencies were calling supply chain finance bank debt. Is this going to happen again now?
Christian Hausherr The accounting discussion is a very relevant one, but the Greensill case is a bigger ball game. It is not only on the corporate balance sheet, but it is also on the bank balance sheet. And what is happening on the corporate side is there was actually, the year before last, when the four big consulting companies reached out to the regulators. This discussion has been going on for one and a half years, and we expect there will be a strong call for transparency in corporate balance sheets, which is good. We fully support that. However, we cannot expect that there will be any general guidance on whether a payable finance is a trade payable or bank debt. This question is really to individuals and it needs to be assessed by the individual auditor. I don’t really expect that there will be any guidance from any regulator on this question.
Clarissa Dann Michael, I’m going to ask you to kick off with the learning points in all of this. What are your takeaways?
Michael Sugirin We as industry participants need to continue to have that age-old conversation around accounting treatment. ‘Yes, no, yes’. In the case of Grensill, there was nothing wrong with supply chain finance itself, it was other asset classes that were brought in which made it look bad. So, again, coming back to what is the definition of supply chain finance, creating that necessary awareness and making sure that there’s strong visibility at all levels, and in terms of understanding the asset.
And I think the last one is really diversification. I think Greensill’s book was highly concentrated; around about 90% of the book was about five clients. Clearly, that creates significant dependency and exposure, so I think those are some of the key learnings.
Christian Hausherr What we have seen from this case is that it’s absolutely important to follow what I would call the rules of the road. There are some principles. There is a basic understanding. There are definitions out there that the industry has published. From a Global Supply Chain Finance Forum perspective, we can only publish and promote these rules. There are some principles and there is absolutely no point in bending these principles like a pretzel. There is absolutely no shortcut; if you follow these rules we have published, you will have a safe and sound business. We can see that when you look fx. at the trade register, where payable finance has been taken into account now in the third year, it’s a very, very low risk. You just have to follow the principles and then you’re safe
Sean Edwards For me it’s two don’t’s and one do. Don’t be afraid of funds – there’s nothing wrong inherently with funds. Don’t be afraid of credit insurance, but do understand what’s in them, what the terms of the policy are, how the funds are constituted, what the risk mitigations are. So, you know, the sort of headline cases often bring you back to the basics, don’t they?
Clarissa Dann Michael, Christian and Sean, thanks so much for coming into the studio today.
Michael Sugirin Absolute pleasure to be on the panel. Thank you.
Sean Edwards Thank you.
Sean Edwards Thanks a lot, Clarissa.
Clarissa Dann I’d like to thank our guests for their expertize and of course, all of you for watching. For further episodes of Trade Finance TV do visit TRADEFINANCETV.NET.