Greensill: What have we learned?

A recap of what we learned about Greensill and some new info - not one of the top 10 exposures appears to have been at arms’ length.

We don’t want to flog a dead horse, but given recent appearances both by Lex Greensill and David Cameron before the Treasury Select Committee and after further investigative work on our part, we thought it was worth recapping what we have learned about Greensill. I particularly enjoyed this question in the Treasury proceedings:

Siobhain McDonagh: Mr Greensill, are you a fraudster?

Lex Greensill: No, Ms McDonagh, I am not.

If you ask anyone if they are a fraudster, you are of course guaranteed one answer.

We have written two main blogs, the first with Marc Rubinstein in July, 2020 and a follow up with Marc in March, 2021. And we have written some shorter updates in our mini-blog in our Club site. This article consolidates what we have covered and adds some new information, notably with respect to one of Greensill’s competitors and counter parties, Tradeshift Holdings. Some of it goes over old ground, we are afraid, but we think it’s important to highlight the whole story.

In our original article, we highlighted that the accounts for Greensill Capital raised multiple red flags, with directors resigning, a non-executive joining and leaving in a matter of weeks and inappropriate auditors and auditor fees. In our second article, we looked at the representation of the business from the main Credit Suisse Supply Chain Finance fund whose top positions are as shown in the table:

*Source: Behind the Balance Sheet from Credit Suisse Supply Chain Finance fund factsheet*

As we were rushing to get our blog published, we could not go into detail on some of these positions, but subsequently through our own further work and some brilliant detective work by journalists at the Financial Times, the Times and Bloomberg, plus some nice tips from readers who have an inside track, we have managed to paint a more concrete picture of the various relationships here.

The first thing to note is that Greensill’s two largest customers are not shown in this table. Various press reported that the GFG Alliance owed Credit Suisse $1.2bn, while Bluestone Resources had exposure of $690m. Total exposures are thought to be $2bn and $850m. Some of this came directly from Greensill Bank. As of October, 2019, the last date we have detailed analysis of positions, there were fund exposures to both (exactly $40m in the case of Bluestone, at least twice that in the case of Liberty, but we cannot assess the total GFG exposure). Our blog explained that the sector exposures looked odd if there were significant debts to Bluestone and GFG.

When we originally looked at this list, we saw a bunch of oddities but having done further analysis, we can now see that there is an issue with the vast majority of these exposures, so let’s go through the top 10.

1 MEDITERRANEAN SHIPPING CO

This is a huge privately owned company and we thought that it was perfectly possible that this was a legitimate and normal trading relationship. The scale of the activity was credible given the size of MSC which is one of the world’s largest container lines and has a major cruise line, as well as other activities. And it may well be legitimate. But it’s interesting that we saw on Twitter that a commentator had spotted that the former Finance Director of MSC had moved to Greensill in Geneva in 2020, suggesting that this might not be an entirely arms’ length relationship.

Now there may be nothing odd about this, but if you read our original blog, you will recall that there was a similar relationship at Vodafone, where the Treasurer moved from Vodafone to Greensill and then apparently recruited his team, as you can see in the table:

Vodafone was reported to be a major customer of Greensill and an investor in the Credit Suisse funds. This type of circular transaction is often fraudulent – if Vodafone had too much cash, why invest it in a fund which was paying its suppliers early in return for a discount? It would be more sensible to use the cash to pay the suppliers directly, and take the whole discount yourself rather than paying Greensill, Credit Suisse and the insurers a margin. This clearly makes no sense, unless you observe that the Vodafone Treasurer went to work at Greensill. That is why the MSC parallel is interesting, not that we know whether MSC is an investor in the Credit Suisse funds.

The same Twitter commentator, who may be something of a conspiracy theorist, believes that there could also be a VAT export fraud here, as empty containers can be used to do this type of VAT scam, but we would be surprised if MSC, a long established privately held shipping line, was that desperate for funding.

2 VIEW INC

This is a glass manufacturer which received $1.1bn in funding from Softbank in November, 2018. It produces a smart glass, which reduces heat and glare, but is reported to have been cutting employees and closed its Mississippi plant last year.

The puzzling thing here is the size of the supply chain finance facility – the $275 loan is some 10x its revenue of $24m in 2019 and first 3 quarters of 2020, when the business lost $200m. At September 2020, it had total liabilities of $375m, suggesting that Greensill was its main, if not only source of finance, other than convertible preferred stock.

Interest expense for the Q3 was $19m or $25.6m annualised for the full year, suggesting that the debt would have been more appropriately allocated to the high risk SCF fund which paid a higher rate of interest. This is a smaller fund, $1.8bn vs $7.3bn for the main fund at January, 2021, suggesting that this may have been too large an exposure.

3 BCC BINGERA AND 10 BCC FAIRYMEAD

Some great work has been done by journalists on this, including Robert Smith at the FT, who identified that BCC Fairymead was an internal name for a loan to Katerra, a failed construction company, backed by Softbank, The article explains that Softbank loaned money to Greensill to cover the losses at Katerra – in addition to its equity stake in Greensill, Softbank will lose another $1.15bn in loans extended to Greensill, taking its total exposure to $2.6bn. Some $400m of that was related to Katerra.

We understand that these structures relate to multi-obligor notes which are packages of debts to different obligors. In the case of these two, though, the multi-obligor packages were to a single obligor, with one being for Katerra and the other thought to be Bluestone Resources, the company which was lent $850m (of which $690m came from Credit Suisse) and subsequently sued Greensill. It alleges that it is not obliged to repay the money because it was given long term loans, although they were classified as trade finance on the basis of future receivables for sales to customers yet to be identified. I am not making this up and great work by Matt Levine at Bloomberg who combed through the deposition.

Note that presumably Softbank lent Greensill the cash to repay the Credit Suisse funds but at least the $84m Fairymead loan was still outstanding. Bingera and Fairymead are areas in Lex Greensill’s beloved home area of Bundaberg, Australia.

4 OYO HOSPITALITY UK LTD

Here the link to Softbank is explicit. Oyo is the Indian hotel chain whose founder, Ritesh Argawal, borrowed $2bn to increase his equity stake at the same valuation as Softbank’s injection. I am not making this up –he increase his stake in Oyo from 10% to 30% by buying stock from Sequoia Capital and Lightspeed Ventures (two highly successful west coast VC funds).

“It’s unimaginable. At 25, he’s going to be world’s biggest hotel king.”

Masa Son on Ritesh Argawal

What really is unimaginable is not that the founder would borrow $2bn to increase his stake, but that the banks would lend it to him, apparently with the stock as collateral. Apparently, Oyo has a significant network of hotels in India but overseas, it had to recruit hotel owners by guaranteeing a minimum amount of revenue – not a recipe for success in a pandemic. Oyo Hospitality UK Ltd had sales in the last filed accounts covering the 7 month period to March, 2019 of £20k and £2k of trade debtors, but the share capital has since increased to £350m. The UK business now has 80 hotels with 2500 rooms, as of March, 2021. It therefore appears highly likely that the suspiciously round number of £200.0m is a loan, not trade finance.

Oyo Hotels in London. Source: Booking.com

If you are looking for a cheap room in London, the first two hotels I found on May 17, 2021 via Google were £27 in Golders Green (right) and £49 in Acton (left), as shown in the pictures. Why this platform should prevail over Expedia, booking.com, hotels.com, laterooms.com and all the many other incumbents is something that puzzles me. But armed with £550m of capital, I would have imagined that they could grow their network pretty significantly, especially in a pandemic. 80 hotels though…

5 SHOP DIRECT HOLDINGS AND 8 PRIMEVERE LTD

Shop Direct is part of the Very group which had over £2bn of debtors for its (former catalogue and now online) credit business. We previously noted Primevere was a UK fulfilment centre with £4m of sales which looked odd in the context of a debt of over $100m. The company is ultimately controlled by the Barclay Brothers, owners of Shop Direct.

An article in the Times explained that sources close to Shop Direct indicated that the $102.7 million Primevere debt was for a commercial mortgage on a warehouse — a mortgage is hardly supply chain finance. The article also stated that Shop Direct sources said the $193m was a term loan for “general corporate purposes” and was not used for advances to suppliers.

Apart from the Primevere relationship, we wondered if there were a personnel linkup between Greensill and Shop Direct. So far we have not found one; indeed the relationship seems to be in the other direction – 10 developers and systems experts have joined Very from Greensill since its demise.

*CS SCF Fund Shop Direct Exposure as of October 2019 Source: Fund accounts*

As of October, 2019, Shop Direct Holdings obligations in the main fund amounted to c.£80m, and there were several individual line items; this looks like what one would expect from legitimate trade finance transactions; but it’s possible that a new loan was granted in the interim. In any case, it’s clear that the two relationships are not “ordinary course of business” supply chain finance.

6 TRADESHIFT HOLDINGS

This is where it starts to get really interesting because the press so far has barely mentioned Tradeshift Holdings whose website claims it helps businesses:

Connect with all their suppliers digitally
Remove paper and manual processes across procure to pay
Buy what they need faster and manage supplier risk

Its website proudly claims a long list of investors like Goldman Sachs, HSBC, VC arms of Santander and American Express and Intuit. The company raised $250m at a valuation of $1.1bn in 2018. An industry article quoted Goldmans:

“Tradeshift has established itself as a leader in supply chain commerce by enabling corporations around the globe to take greater control of their supply chains. Per Darren Cohen, Goldman Sachs’s global head of principal strategic investments.”

Owler suggests that it has to date raised $765m in capital and has $100m of revenue. Growjo estimates its revenues at $96m and its total funding at $661m. Dun and Bradstreet put its 2018 revenues at $46.17m, a pretty precise number which suggests it’s not an estimate.

It’s puzzling why this company would be raising $163m in supply chain finance but it appears that it’s actually a loan. The WSJ reported that this was actually a 5 year term loan, agreed between Lex Greensill and the Tradeshift founder Christian Lanng over glasses of wine. (If any bankers are reading this, I need to borrow some money and am available most lunchtimes).

Mr Lanng is a Danish national and the website claims that 95% of Danish businesses use Tradeshift today. This outlandish claim is almost certainly untrue, but more interesting is that Mr Lanng is a director of UK subsidiary Tradeshift Network Ltd which has share capital of £1 and has not filed accounts since its 2018 numbers.

*Tradeshift’s funky website Source: https://tradeshift.com/about/*

These show that turnover had climbed over 50% to £23m but the loss had increased, by even more than the sales increase, to £10.8m. There was £4m of net cash (and a £45m payable to group companies) on the balance sheet which also showed financial instruments of £34m receivable and £48m of liabilities. It’s puzzling why an invoicing automation company would have these lines in its accounts. A possible explanation might be that it was engaged in supply chain finance.

You might assume that a supply chain finance company could not possibly borrow from another supply chain finance company, let alone a supply chain finance fund – all those fees payable to Greensill, the insurers, Credit Suisse and others. And why would Greensill lend to a competitor or a potential competitor? The WSJ article suggested that if Tradeshift defaulted, Greensill would own the company, which would be one possible explanation.

But I would be worried lending to a company which had not filed accounts and I would be even more worried if it was Tradeshift’s UK subsidiary, as I shall explain. Note that the debt appears to be with the parent, but presumably Greensill, a company whose main presence was in the UK, would run the ruler over the UK filed accounts of any subsidiaries as part of its due diligence.

If they had done so, they would have found something unusual. Its auditor is BDO, which is #5 in the UK, but is notable for the rarity of its appearances in the FT, in contrast to its peers who are regularly in the news because of multiple frauds such as Carillion, Wirecard etc. BDO refused to issue an opinion on the Tradeshift UK accounts. It stated inter alia that adequate accounting records had not been kept and that they had not obtained all the information necessary to do the audit. This alone would surely be sufficient not to extend a loan to the holding company, especially as the founder was the director of the UK company.

According to Bloomberg, a group of investors led by the West River Group recently invested $200m in the company, described as a “working capital finance startup”, at a valuation of $2.7bn. It appears that the funding has been provided in the form of convertible bonds. The timing in early March, 2021 coincided with the demise of Greensill, so may have been required to roll over that facility, or maybe for other SCF purposes or even general corporate growth. Tradeshift has been using blockchain-based payments, perhaps the reason for the valuation. I suspect we may hear more about Tradeshift, going forward.

Readers should not construe from this that Tradeshift is a fraud. In the case of Greensill,, when Marc Rubinstein and I wrote the original blog, there were clear signs of unusual and potentially fraudulent activity:

– The circular transactions by Vodafone.

– The circular transactions by Softbank.

– The addition of high profile individuals to the executive base to lend a veneer of respectability.

– The red flags in the accounts, notably on directors and auditors.

– The fleet of aircraft.

– The close association with Gupta and GFG, itself attracting closer scrutiny.

– The unwind of GAM.

All of these were grounds for observers like us to ask what’s going on here? In the case of Tradeshift Holdings, we would like to ask questions about:

– The founder’s cult of the personality and the “bro” image presented on the site for a B2B operation.

– The outlandish claims on Danish penetration. My Danish contacts say the company is well-known but not ubiquitous – clearly, most businesses would not need to use a service like this.

– The statement that they intended to cut staff and reduce costs after their fund-raising in 2018. Usually, it’s the reverse – you raise money to grow the business.

– The recent failure to file UK subsidiary accounts.

– The failure to keep proper accounting records.

– Circular transactions, using a competitor as a source of finance.

These last three certainly look to be a concern for investors and would that be apparent to a west coast VC firm investing in a tech software business? All of these present a picture of a company that is at least trying to present itself as more successful than it really is. To be fair, that’s what all PR tries to do, but in this case, it may also be to raise further capital or to keep a tired business afloat. It’s conceivable that Tradeshift is growing so fast and enjoying so much success that it just doesn’t have time to maintain the accounting books, but I have rarely seen that as a signal of a successful business.

7 GUAZI LTD

Chehaoduo Group is backed by the Softbank Vision Fund and is the parent of online used car platform Guazi and new car seller Maodou. Why a used car platform would require supply chain finance is a mystery as its costs are largely software and servers and its customers would generally pay in advance. More likely this is again longer term funding to make a Softbank investee look more cash rich.

Chehaoduo received $1.5 billion in a Series D from Softbank at a $9 billion valuation in February 2019 and a further $200m in May, 2020 from Sequoia and the Vision Fund. It claimed to have reached profit in Q4 19, so why it needs another $200m in equity and $150m in loans is something of a mystery.

9 DEUTSCHE BÖRSE

Most will know Deutsche Börse, and a WSJ article explained that Greensill used the CS funds to make a loan to its investor General Atlantic, which “ used the loan to fund the acquisition of shares in a joint venture with German exchange operator Deutsche Börse AG”.

Deutsche Börse 2020 accounts show that its total investments in joint ventures and associates, amounted to €89.5m (€44.5m), with cash invested in the year of €26.4m. And in its list of subsidiaries and investments, it states that “There were no joint ventures as of the reporting date”.

Deutsche Börse had €8bn of financial assets at end-2020, so would not be an obvious candidate for a top 10 position in the CS SCF fund with nearly $100m of supply chain finance. The WSJ article suggests that the loan to General Atlantic was for $350m and it’s unclear whether this $95m debt is part of the $350 or something separate. One thing seems clear – it’s unlikely to be supply chain finance.

CONCLUSIONS ON THE TOP 10 POSITIONS

From the above, it is clear that 8 of the top 10 positions in the largest fund were not straightforward supply chain finance. Of the other two, Shop Direct is clearly not a standalone financing and there is a connection between MSC and Greensill in senior personnel.

OTHER POSITIONS

We have encountered a series of random interesting and peculiar transactions in the mix at Greensill. We asked whether the CS funds sector exposures were accurate. Bloomberg wrote about a loan made to a school owned by a neighbour of Lex Greensill. Our article about Catfoss Renewables, a business with £15k of turnover which borrowed £23m from the CS Fund was picked up by the press. The former Credit Suisse Global Head of Investor Relations, Ian Roundell, was a non-executive director of the Catfoss Group.

There are many other lines in the CS securities list which we would like to investigate, but this is not my full time job. But it should be for someone. And we have not mentioned here the Greensill-arranged GFG acquisition of the Scottish hydro assets which received Scottish Government guarantees. That transaction looks odd, and it’s possible that GFG managed to be paid to acquire the smelter and hydro assets from Rio – quite a feat. But we have encountered an impasse in information so if anyone can help we would love to hear.

CONCLUSIONS

Lex Greensill may deny being a fraudster, but there are certainly a number of Greensill transactions which require further explanation. Robert Smith in the FT has done some excellent investigation and analysis and the FT recently published an article (and Robert has tweeted) suggesting that Trafigura had warned Credit Suisse that a receivable in one of the supply chain finance funds attributed to them was not real. The article reports that Credit Suisse took this up with Lex Greensill, who “explained that he believed there had been a misunderstanding around what the fund filings represented”. Presumably, fund investors are going to be pretty unhappy about not getting all their money back, and with this sort of evidence, civil suits may start flying around, unless Credit Suisse makes investors whole. But action is required from regulators and authorities. I hope we shall now see:

1) A full investigation into Greensill. I don’t know where the boundaries should lie, but there needs to be a proper investigation into whether a fraud has occurred and whether the CS fund documentation has offered full disclosure.

2) A disciplinary hearing by the Swiss CFA Society into the two fund managers of the Credit Suisse SCF funds who have the “prestigious” CFA designation. I am amazed that the investment analyst profession globally appears to rely on this certification from a profit making business. I think I could do a better job. Seriously.

3) A review by the FCA of all UK based investors in the Credit Suisse funds. These funds were for professional investors and fiduciaries who invested in the main fund clearly did not do enough due diligence. They should be required to explain themselves to their regulator.

4) An investigation by the regulatory authorities as to why this business remained unregulated, and whether supply chain finance should continue to be unregulated – the answer seems obvious from analysis here.

5) Some good news: the successor to the FRC going forward will be required to check the accounts of systemically important companies like Greensill. It’s an encouraging development that we should have this form of scrutiny. I don’t know whether it will prevent a collapse of this nature, but the team there should be given sufficient resources to give it a fighting chance.

It has been a fascinating exercise looking at Greensill and it’s a useful reminder that we should always exercise care when making investments – the counterparty is not always what it seems. There are lots of takeaways from this, but the one I emphasise to my students is that when something smells bad, either walk away or increase your due diligence significantly. There are a lot of crooks; they can significantly damage your wealth; and if you exercise diligence and use your common sense, you will easily avoid them.

(Note that we are mildly flattered to have been sent links to several articles, videos and podcasts which repeat almost verbatim some of our analysis; guys, it would be nice if you could please just quote the original source.)