Monday, March 8, 2021

Greensill - who is holding the bag?

There has been much fabulous reporting in the lead-up to the collapse of Greensill, the eponymously named Australian domiciled but London headquartered supply chain financier. But if you want guidance start with anything by Duncan Mavin (from the Wall Street Journal) or Robert Smith sometimes with Olaf Storbeck (at the Financial Times).

The excellent work of these journalists is now on the front page above the fold. It is not everyday a globally significant financial institution fails, and it is rarer still that this collapse happens within a couple of percent of all time highs in markets.

There has been remarkably little coverage of where the losses (which will be enormous) will sit.

I do not know either. But I am a short-seller at heart and trying to work this out seems like a core task for me. 

I will start my speculations at home in Australia.

In late November 2020 I wrote a letter to the Australian Prudential Regulatory Authority (APRA) about the credit risk that Insurance Australia Group was taking on Greensill. Here is that letter (which given outcomes looks rather on point). 

This letter is slightly modified, correcting punctuation and having some redactions.

Greensill and Insurance Australia  Group 

First - you need to know what Greensill and Lex Greensill are.

Lex is a controversial and aggressive factoring/supply chain/trade finance financier. Possibly the most controversial one in the world.

He is an Australian - bought up on a farm near Bundaberg in Queensland - and the parent company is Australian domiciled and still has a Bundaberg address.

The enterprise however is vast - and - by far - the biggest company headquartered in Bundaberg. 

The official version piles on the humble origins.

The unofficial versions focus a little on the indulgences, the family jets etc. Though apparently (and according to one of the articles attached) he is selling the fleet of private jets (four of them) as he takes money from Softbank.


Greensill is controversial. They financed the fraudulent NMC Health. 

More publicly they were involved in the collapse of the GAM funds that was widely publicised.

In that case the fund manager Tim Hayward overloaded his fund with Greensill paper at valuations some considered questionable.

Since Hayward's fund collapsed there have needed to be new large-scale sources of finance.

The biggest of these is that Greensill bought control of a tiny (and failing) German bank, recapitalised it, took a huge pile of brokered deposits (by paying about 100-120bps over) and either bought Greensill receivables or pledged bank assets to get letter of credit capacity to support Greensill activities.

The annual report for the bank (alas in German) is attached. The bank assets are largely "insured" but we cannot tell who they are insured by.

What we can see is the Credit Suisse fund that has deep Greensill relations (and is also the subject of this excellent article in the WSJ -

I have attached a letter from the Credit Suisse Supply Chain Finance Fund. A good way to start would be to get EVERY letter and prospectus from this fund and any other Credit Suisse fund with a decent Greensill exposure.

The fund is USD5667 in size - as per this cut-and-paste.

Other than 10 percent US Treasury holding it is diversified as to the countries that the assets are from and the industries that they are in.

But it is not diversified as to the the source of these assets (Greensill, Greensill and Greensill as far as I can tell) or the source of the insurance on these assets.


It is 56.1 percent Insurance Australia Ltd as per the following.

Now that is USD3.18 billion in exposure - just through one fund. That is AUD4.4 billion.

That is just the Insurance Australia exposure I can find.

I am assured the bank assets are also largely insured - but I cannot find who the insurer is.

So you would think that this is a disclosable large exposure to a single controversial financier. But the only statement in the IAG annual report is as follows:

That is it. They say it is in run-off. They feel no need to disclose a multi-billion dollar exposure to a questionable credit/s.

The only problem is that no insurer (other than Tokio Marine) seems to insure for them any more and the amount insured is rising fast.

I think the insurance is written at a broker in Sydney:

This entity used to be owned by IAG and Tokio Marine - but IAG sold their bit to Tokio Marine. However the insured amounts keep going up (at least the bits I can find) even though IAG say the thing is in run-off.


I have some hypotheses. Either

a) An amount - at least 4.4 billion - but possibly much higher - is insured by IAG. Given the size (say 50 plus billion) and controversy of Greensill this is potentially a solvency risk for IAG.

b). Greensill is faking IAG insurance policies - and the amounts are not insured by IAG but Greensill says they are. In which case the German Bank (taking all those insured bonds) is facing solvency risk - and you should be talking to your German counterpart.

c). The Credit Suisse documents are fake. I think this unlikely but cannot dismiss it.

Either way it is one of the uglier situations I have seen lately.


APRA (and to the extent I talked to them the Australian Securities Commission) dealt with me professionally. I was originally not short any company mentioned, but I did not want to restrict my ability to trade. They asked me a few precise questions but gave me no indication as to whether they took these issues seriously or what they were thinking. I wanted no insight to their thoughts and they gave me none.

But Sarah Danckert in the Age has reported (quoting multiple sources) that APRA has been interested in the situation since November. So I  guess my letter had the desired effect although for all I know APRA may have already had the situation in-hand.

Anyway it is clear that IAG had a large and thinly disclosed Greensill risk.

The collapse of Greensill and the role of the insurers

Tom Braithwaite in the Financial Times (and others) have reported that the proximate cause of the collapse of Greensill was that these insurance policies were not renewed. This led to a chain of events whereby Credit Suisse funds stopped accepting Greensill assurances and BaFin (the German regulator) took over Greensill Bank.

The best bits of information however come from an Australian court case.

Late at night and in emergency sitting the Supreme Court of NSW (a first-instance court despite its title) heard an urgent after-hours application for an interlocutory mandatory injunction compelling insurer to issue a trade credit insurance policy. 

This was always a long shot. The policy terms require 180 days notice to terminate or the insurer might be forced to renew. 

The argument Greensill made to the court was that maybe 179 or 178 days of notice was given, not 180 days and that Insurance Australia Group should be forced to renew USD4.6 billion in credit insurance for which it had no reinsurance coverage.

Understandably at a last-ditch 7PM hearing a single judge wasn't prepared to bankrupt a major Australian insurer by forcing renewal.

You can find the judgement here.

Greensill duly collapsed as they told the Judge that it would.

That said, the question of whether Greensill can force renewal of those policies is still open and is still going to court. All the judge decided was that at short notice and on only an "arguable" case he wasn't going to issue a mandatory injunction. 

So there will be a court case to come. And the court case will reveal new details and make important decisions.

The alleged rogue underwriter and what is at stake?

Jenny Wiggins and Hans van Leeuwen in the Australian Financial Review tell a story about a fired underwriter who had exceeded his authority by binding insurers  to contracts insuring Greensill to the tune of about $10 billon. (From the context I read this as 10 billion US dollars rather than Australian dollars). The core quote is:

BCC director Toby Guy wrote to Greensill chief executive Lex Greensill and Greensill Bank director Markus Nunnerich on August 4, telling them that Mr Brereton had exceeded his authority in approving customer limits to Greensill between July 2019 and July 2020 when he signed numerous comprehensive trade credit insurance policies worth about $10 billion. He was dismissed on July 8, 2020.Many insurance policies have terms that require insurance companies to renew and there is complex law around this. I am neither a la

There are several things to observe here.

First BCC is that Sydney based insurance broker I mentioned in the letter to ASIC. It bound insurance policies for both Insurance Australia Group and Tokio Marine. 

Second the 10 billion dollars in policies are substantially larger than the policies disclosed in any  Credit Suisse documents - so I am guessing that they include the policies that purported to protect the assets of Greensill's German  Bank.

Third, and most importantly, the policies were written until July 2020. This is important because most insurance policies cover 12 months, and many credit insurance policies are longer. If BCC was writing  policies until July 2020 some of them are likely still in force.

If that is the case Insurance Australia Group and Tokio Marine are staring down the barrel of some very large losses.

Insurance Australia Group is a minnow. Large losses on this scale could reasonably bankrupt it. Tokio Marine is a relative giant and large losses will hurt but not mortally wound it.

Fortunately for Insurance Australia Group they sold their interest in BCC some time ago to Tokio Marine so their exposure may not be large.

That said  - if they are eventually forced to renew exposures on old policies (as per the argument Greensill put at the late night court case) then IAG may incur some very large losses, especially as they appear not to have renewed their reinsurance (as disclosed in NSW Supreme Court).

You may think I am drawing a long bow here, but Insurance Australia Group recently lost a major case on pandemic caused business interruption insurance and were forced to raise AUD865 million in extra capital to remedy their "mistake". The mistake  was contract wording.

That said it will be up to the courts (and most certainly not me) to work out the extent to which Tokio Marine and AIG are left holding the Greensill bag.

A plea for disclosure

Insurance Australia Group disclosure on Greensill has been appalling. There are exposures potentially large enough to bankrupt them that were undisclosed. Robert Smith, Michael Pooler and Olaf Storbeck in  the Financial Times describe the problem as a "rogue underwriter".  To quote:

One insurer has already laid the blame for the scale of cover it extended to the company at the feet of a rogue underwriter.

“This is similar to what blew up AIG in 2008,” says one person close to the brewing disputes, in reference to the complexity of the contracts involved.

A rogue trader can kill a bank as per Barings, but the situation with insurance is even more stark. Rogue underwriters crashed AIG - previously the largest market cap insurer in the world.

Given the scale of the issue and the fact that key details have been partially disclosed in court I think it is time for a more public airing than this blog post.

I do not know the disclosure rules in Japan (applying to Tokio Marine) but the continuous disclosure rules that apply to ASX rules seem to impose some duties on Insurance Australia Group and potentially its directors.

What if the liabilities for Greensill losses do not fall on insurers?

It is possible that insurers will duck much of the liability to make good Greensill losses. If policies were written as late as July 2020 (as per the above quoted financial review article) it is unlikely insurers will avoid all liability, but depending on what policy was written when, and depending on the wording of those policies they may duck most liability.

So then someone else may be left holding the bag.

I think there is a good chance that someone will be Credit Suisse Financial Group.

Here is the final letter to clients of one of the credit funds

Here is the core client pitch:

The fund seeks to generate stable and uncorrelated returns by investing in notes with a maturity of typically less than one year which are backed by buyer confirmed trade receivables/ buyer payment undertakings, supplier payment undertakings and account receivables (”Receivables”). The underlying credit risk of the notes is insured by highly rated insurance companies. The Fund aims for a target return of 1.50% p.a. above the 3-month USD LIBOR and a short term maturity profile.

The highlighted section is  a doozy. It says that the underlying credit risk of the notes is insured by highly rated insurance companies.

Well it either is or it isn't.

If it is insured Insurance Australia and Tokio are in a world of pain.

If it is not insured then one might expect extensive litigation and potentially large losses at Credit Suisse. 

GAM, who previously had a fund exposed to Greensill and has barely recovered.  Here is a ten year stock chart. The decline from 15 Swiss Franc to under 5 Swiss Franc per share is Greensill related.

So who is holding the bag?

Well, genuinely I do not know. It could be Insurance Australia Group or Tokio Marine. It could be German taxpayers (through the subsidiary bank) and Credit Suisse.

I figure I know the winners though. Lawyers. Lots and lots of lawyers.

And maybe a short seller or two if we pick the shorts right. You can presume I have some position in  most of the companies mentioned.



Anonymous said...

Without knowing any details, I would suspect that it is the German taxpayer again (I am one). Our authorities are full of incompetent lame people. People that are not capable of surviving outside these sheltered jobs. Wirecard was only the tip of the iceberg. Same sort of people are in charge of the vaccination program here. It is a shame.

memyselfandi007 said...

As always, German Taxpayers will be on the hook here.

Germany remains a paradise for fraudsters with a bank license.

bruce said...

Excellent post. I doubt it is Credit Suisse. Excluding 2008, investment banks seem to be good at making sure someone else left holding the bag.

Anonymous said...

Per Greensill's 2019 accounts, it reads to me like the insurance has a deductible and that they (Greensill) take this on themselves. Totalled about $1B at the time. Assuming it is (say) 10% of the claim, and (less presumptively) they can't make good this 10% over a few billion in losses, my uneducated guess is that the funds will take some decent losses if defaults start to mount. Which makes the CS claim of fully insured look a bit misleading.

dearieme said...

"Wirecard was only the tip of the iceberg"

One of the sad little lessons I've learned over the past couple of decades is that Germany is rather corrupt, contrary to the stereotype widely held in Britain.

Anonymous said...

I'm a turnaround advisor who has a bit of knowledge of supply chain finance (enough to be dangerous) due to my profession. I am a bit baffled about the public reports that GFG is cash flow insolvent as Greensill steps away from financing its supply chain.

The way SCF is supposed to work is a circle:
(1) Supplier provides goods to GFG (on long payment terms, longer than what the supplier would ordinarily agree to absent a SCF agreement)
(2) Greensill pays supplier (on shorter payment terms) at a discount
(3) GFG pays Greensill (when the supplier's [long-dated] invoice is due)

It has been reported that GFG has stopped paying Greensill under (3). Presumably this means Greensill is probably no longer paying suppliers under (1) as it wouldn't expect GFG to pay it back. The causality is likely the reverse -- Greensill said it wouldn't accept any more payables due its own liquidity issues, and as a result GFG stopped paying Greensill.

Without financing, GFG suppliers are likely requiring shorter payment terms in order to continue supplying GFG. So that working capital contraction could cause a liquidity crisis... BUT, remember, GFG is not paying Greensill! So assuming GFG pays its suppliers on the same terms they got from Greensill (which, why wouldn't they accept them, they'd be no worse off) -- this should be liquidity neutral for GFG. They would still have the balance owned to Greensill to work out, but that could presumably be negotiated and/or refinanced, and wouldn't directly cause a liquidity crisis unless Greensill tried to intervene in GFG operations to get paid.

But that isn't what is being reported. Why is that? What is going on?

Unknown said...

Leaving aside the issue of insurer liability, very little is said about the performance of the receivables themselves. If the receivables are performing, won't everyone go home in one-piece (though a little shaken by the experience)? GAM's stock price performance since the Tim Haywood and Greensill revelation might not be an indication that the Greensill receivables are bad, but could just be poor perception about GAM's internal controls (and with good reason).

Anonymous said...

It would need to be checked within the documents, but it is possible that the receivables purchased prior to the expiry of the insurance are covered, which would make credit events covered the insurers' issue (such as a payment default by GHG). The lack of insurance post the expiry would cease the origination of new receivables, which would close the funds, as they cease origination.

So if GHG keeps paying, then the funds themselves may wind down in a somewhat orderly fashion. This doesn't appear to be a certainty, and may in fact be quite certain that they will not keep paying. If they are relying on extended terms, then it may make it a bit difficult.

I have heard that there is some credit support provided to Greensill itself, which would likely be serviced (if not ultimately repaid) from the profits on future receivables financing. While I don't think it is large ($150m or so?), this would likely be a total loss for the lender, and would also cause issues with the orderly wind-down of the business, without some sort of backup servicer arrangement. Nothing like a bit of subordinated holding company lending over financial assets to remind us of 2008. With some insurers chasing yield thrown in also - we had some fun with insurance wrapped bonds in the GFC, that were all of a sudden not wrapped anymore.

But it all looks great for the lawyers, as you say.

Anonymous said...

Trade credit and insurance is meant to be 'self-liquidating'. Essentially a supplier is paid off early by Greensill (in this case) who steps into its shoes (and owns a receivable from the Buyer of the underlying. This receivable is then wrapped by the insurer (leaving a retention amount in order to align interest) and was what appears to have been sold to Credit Suisse (CS) clients. The buyer gets paid when they manage to sell good to their customers. Well theoretically that's how its 'meant' to work.

These CS clients 'should' now have the following risk profile:
1. Buyer sells goods/ gets paid/ pays Greensill (who stepped into the shoes of its suppliers)
2. if buyer defaults insurance pays most of what's due

What I don't understand is how the withdrawal of insurance caused Greensill to become insolvent. Ordinarily, this should have just resulted in an orderly liquidation, unless:

1. The underlying trade receivables were manufactured implying it was either lending unsecured/ lending long and insuring short and therefore dependent on roll-over or warehousing lots of risk on its balance sheet, waiting for insurance to securitise and sell to CS clients

2. The invoices were fraudulent (not self-liquidating)

3. There was some sort of Ponzi scheme

Clearly, there's more than meets the eye at first glance....

Anonymous said...

I wonder who IAG's reinsurer is? They say all net exposure was transferred - the key word for me there is net. Who is the reinsurer and do they still have effective reinsurance in place?

Anonymous said...

„If it is not insured then one might expect extensive litigation and potentially large losses at Credit Suisse“ —> non payment by insurance is highlighted as risk in the final letter, sorry.

Anonymous said...

IAG have no exposure to Greensill, but can they say the same thing about GFG?

Anonymous said...

You really do need to be a bit careful with what you write in these posts when you are not actually in possession of the full set of facts. As IAG has now stated:

"In response to market enquiries relating to Greensill exposure, IAG clarifies it has no net insurance exposure to trade credit policies including those sold through BCC to Greensill entities."

You of course are also not a member of the legal profession, so please leave the legal commentary to the experts.

A lot of supposition on this matter is not helpful to anyone - unless of course you have a short position in the mentioned companies, and as such, you are just talking your own book (I'm so sick of hedge fund managers doing this).

Anonymous said...

John, you do realise that Berkshire Hathaway uses IAG paper to write commercial business in Australia. It would be all reinsured to Berkshire using quota-share.

Anonymous said...

I do not know who is holding the bag. I do know which stocks do not appear to have suffered any adverse reaction yet.

Anonymous said...

Trade Credit Insurance policies almost always insure 90% of the incurred loss of the insured party (to give some alignment of interest). They do not cover 90% of the notional amount of the receivable as many people think.

santa-poker said...

At least short term, for the German Greansill Bank entity, which just field for bankrupcy, the bag short term will be held by the deposit protection scheme of the private banks[0]. This scheme may then recover some as part of the liquidation proceedings and whatever is recovered. Also, the same site has a great history of the interaction between the German Greensill Bank entity and the various layers of German regulation[1]. There are some really nasty conflits of interest in there, like board members also being board member on the rating agency, the rating agency relying on credit modelling fron a subsidiary of the rating agency... only in Germany.



Unknown said...

I frequently encounter credit funds touting the lack of risk due to reinsurance coverage and it can be a struggle to convince all the salespeople involved that there is rollover and contract risks to reinsurance that only materialize when sh*t hits the fan. Saving this for future reference in such discussions.

Conscience of a Conservative said...

Great reporting. One question. When they say Greensill tranched the credit risk they sold invetors was this done via ABS or CLO?

GoogleUser said...

What an elaborate and intriguing story! If not for Odd lots I would have never heard of the name Greensill. To summarize the whole drama in one sentence, over-stretched Brit steel magnate defaulted on receivables to Greensill, which caused the cessation of reinsurance over its portfolio of assets, which was sold to Credit Swiss Fund. At least one of not all 3 parties: Greensill, reinsurer or the Swiss bank must pay the bill. Your analysis suggests that the reinsurer may get away through legal loopholes, and swiss bank is the biggest lemon, as Greensill may just be an empty bag.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.