How Greensill disrupted the boring supply chain finance industry
Globally the market for supply chain finance has undergone a period of sustained growth over the past decade. In 2020, global supply chain finance volumes grew by 35% to a total value of $1.31 trillion according to BCR.
Supply chain finance, by definition, involves a company entering an arrangement with a lender (often their bank), to allow suppliers to be paid early for their invoices and/or delay their own payment obligations. This creates additional working capital for both the company and their suppliers and is all charged at very attractive interest rates based on the superior credit rating of the buying company.
For decades supply chain finance, or reverse factoring, has been the territory of the major banks and was seen as very much less exciting than other fast-moving, high yield forms of investment. Until that is, Greensill arrived with their spectacular alternative to traditional supply chain finance lauded by both investors and businesses all over the world.
Its charismatic leader Lex Greensill was on a quest to harness the potential of supply chain finance and to democratise access for underdogs across the globe, like his own family farming business. Along the way, he collected accolades, praise, and government access. Even the honour of a CBE.
Greensill delivered two seismic shifts to the traditional world of supply chain finance:
Firstly, by packaging the receivables generated via his programmes into a financial asset for investors (first via GAM and then via Credit Suisse) he created a new, higher-yielding asset class and a deep pool of investors hungry for new funding.
Secondly, he utilised this new structure, together with trade credit insurance, to deliver vast levels of funding to sub-investment grade clients, who drove both the volume and yield necessary to make the whole structure work.
And it worked brilliantly. Until it didn’t.
Why Greensill failed
Greensill was encouraged by piles of Softbank money and the promise of multibillion-dollar valuations at IPO, to revolutionise a fundamentally safe but boring business.
As one industry wag commented,
“I love supply chain finance, but it comes with a Ryan Air lifestyle, not a Gulfstream”.
So where did it go wrong?
While it was no secret, the sheer scale of Greensill’s credit exposure to sub investment grade clients has surprised most industry insiders. Billions of exposure to clients that were in some cases, fundamentally uncreditworthy.
Of course, credit defaults are an inevitable part of the business of lending money. It is true in business (as in life) that if you use your insurance, it will either get very expensive or you will lose it. So when throughout 2019 and the early part of 2020, Greensill’s name kept appearing on the creditor list of almost every high-profile corporate failure, the belatedly revealed refusal by Tokyo Marine to renew their policy, came as no surprise.
It has also been revealed that many billions of funding provided to two very large clients was based on a third Greensill innovation known as “Future Receivables Funding”.
Just to be clear…this is not supply chain finance in any guise. In fact, it is known as ‘Fresh Air Invoicing’ and is something that most lenders would consider fraud.
The high-risk strategy that he took has now been completely exposed. But if Greensill had succeeded in his quest, he would have been revered as a business genius rather than reviled in the press as the initiator of a ponzi-like financing scheme whose demise will wreak havoc on many real-world businesses and their employees.
The importance of relationships in global supply
Greensill was fatally flawed because it overlooked the most fundamental factor in supply chain finance – the trust between lender and client.
The goal of both must be the successful delivery of the client’s product to their customer, and a well-designed supply chain finance programme will provide the sustainable source of liquidity that is essential to achieve this aim.
Supply chain finance is not a magic money tree upon which an industrial empire can be built. It requires robust foundations that reflect the best in business practice.
The importance of non-traditional lenders in global supply chain finance
The final losses to be borne by investors, savers, governments, and insurers from the collapse of Greensill will be measured in the billions. However, Greensill counted for a relatively small piece of the global supply chain finance market and operated in a way that was quite unlike the rest of the suppliers.
We don’t expect a major impact on the supply chain finance market, except for businesses in the global commodities sector, where the original problem remains.
Unless you are amongst the top tier of investment-grade businesses, traditional lenders have prohibitive lending criteria, particularly when operating in far-reaching jurisdictions or non-traditional commodities. Ironically these are precisely the areas where a smaller, expert company like Woodsford Tradebridge can offer the most value.
We have a dedicated team of experts that operate all over the world. With years of experience in commodities and global supply chain finance, our goal is to provide the liquidity and expertise that drives our client’s success.
We will continue to actively fill this gap in the market. Offering our clients the security of lending from our own private funds and using our own technology and credit risk processes to assess each business’ requirements
This allows us to support our clients with impactful facilities that enable them to seize each high-value opportunity.
To find out whether a Woodsford TradeBridge facility could be an option for your business, contact us today.