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Another SoftBank Unicorn Gets in Trouble: “Reverse Factoring” Specialist Greensill

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Via Wolf Street

“Its track record of disrupting traditional financing” hit by fallout from client companies that suddenly collapsed under undisclosed debts. Tentacles spread to Credit Suisse.

By Nick Corbishley, for WOLF STREET:

SoftBank appears to have a brand new problem on its hands: UK-based unicorn Greensill. Last year, SoftBank’s Vision Fund invested  $1.45 billion in two rounds in this company. The second round pushed its “valuation,” decided behind closed doors, to $6 billion. The stated purpose was to allow Greensill to continue “its track record of disrupting traditional financing.”

Greensill provides supply chain financing in form of “reverse factoring” which can be used by companies to create the illusion of cash flow, reduce the appearance of debt, and mask the true state of their leverage ratios. Three of Greensill’s reverse-factoring client companies — NMC Health, rent-to-own retailer BrightHouse, and Singapore commodities trader Agritrade — have spectacularly collapsed over the past three months, under billions of dollars of undisclosed debts and amid red-hot accounting scandals. And the tentacles have spread to Greensill’s and SoftBank’s relationships with Credit Suisse:

NMC Health, which in early March we dubbed “the first Enron” of 2020 after the UAE-based FTSE 100 health care company suddenly “discovered” $2.7 billion of undisclosed debt, on top of its $2.1 billion of disclosed debt. Since then, an additional $1.8 billion of heretofore hidden debt has been unearthed, taking the company’s total debt load to $6.6 billion.

BrightHouse, the UK’s largest rent-to-own lender whose business model essentially consisted of providing finance rental agreements to cash-strapped consumers. Those consumers ended up owning the products they rented as long as they were able to endure the long payment periods and exorbitant interest rates, which could reach as high as 69.9% APR. Many did not. The UK government’s announcement of a three-month payment freeze on rent-to-own loans in April, as part of its Covid-19 measures, was the final straw for Brighthouse, which already faced millions in compensation claims.

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Agritrade, a Singaporean commodities trader, that went under in February, after many of its banks refused to continue backing its souring commodities bets. At its demise the company had $1.55 billion in outstanding liabilities to dozens of creditors, including $983 million owed to secured lenders. Many of its lenders accuse the company of misreporting and other financial regularities. “There is strong evidence that a massive, premeditated and systematic fraud has been perpetrated by the defendants,” said Dutch bank ING, which is on the hook for some $100 million of the debt.

What these three now insolvent companies had in common was that Greensill arranged reverse factoring financing for them. Here’s how it works: a company hires a financial intermediary, such as Greensill, to pay a supplier promptly (e.g. 15 days after invoicing) in return for a discount on their invoices. The company repays the intermediary at a later date. This effectively turns the company’s accounts payable into financial debt that is owed to a financial institution. But this debt was not disclosed as debt and remained hidden to investors and auditors.

Greensill may now have to cover some of the losses resulting from its funding of these three insolvent companies. That funding was arranged through a number of funds belonging to Credit Suisse, which forms part of an incestuous relationship with Greensill and SoftBank. Credit Suisse’s asset management division relies solely on Greensill to source investment opportunities for more than $8 billion of supply chain finance funds, according to the FT. And as much as 15% of that money ends up going to companies controlled by SoftBank’s Vision Fund.

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In other words, Greensill exclusively brokers the assets of Credit Suisse’s supply chain business. Then, by some shocking coincidence, many of those assets end up financing companies funded by Greensill’s biggest investor, SoftBank’s Vision Fund — which already booked a $16.7-billion loss for its fiscal year ended March 31. Among the companies receiving the funds are car financing business Fair Financial, hotel chain OYO Hospitality, window manufacturer View and auto sales company Guazi.

In past years, Greensill was also instrumental in helping both Abengoa and Carillion conceal their outsize debts and obligations until the day they collapsed, leaving investors shouldering billions in losses. As has happened with NMC Health, new debts and liabilities just kept popping up.

Greensill was also implicated in last year’s GAM scandal, which ended up costing the Swiss asset manager more than €1.5 billion in losses and leading to the dismissal and fall from grace of Tim Haywood, one of London’s most respected fund managers. Among other things, Greensill was accused of providing false information about bonds it had issued for GAM, which can be considered as market abuse in the UK, where the crimes took place. If such a charge sticks, it can lead to companies or individuals being banned from involvement in regulated activities such as the arranging of bond deals.

That didn’t happen. Instead, Greensill’s Australian owner, Lex Greensill, a former Morgan Stanley and Citigroup banker, continues to boast of being one of Europe’s largest non-bank bond issuers. Greensill is also among a number of supply chain finance firms being tapped as external advisors for the UK government’s business support program. Clearly, the huge supply-chain disruption and financial mayhem being caused by the virus crisis opens up opportunities for supply chain finance firms like Greensill to exploit.

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Even before the crisis began, Greensill had acquired Freeup, a London-based company that is developing technology to enable workers to receive early payment for earned, but unpaid, wages, supposedly at zero cost to the employee. By applying a similar model to its reverse factoring services, Greensill hopes to install itself as a financial middleman between companies with cash-flow problems and their employees, just as it has between hard-up companies and their suppliers. But in order to fulfill that new role, it will have to through the current crisis first. By Nick Corbishley, for WOLF STREET.

But those paper gains that SoftBank had booked sure were fun while they lasted. Read... SoftBank’s Fake Startup “Valuations” Come Unglued

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