Photographer: Markus Hibbeler / Bloomberg
Photographer: Markus Hibbeler / Bloomberg
Long before Credit Suisse Group AG has been forced to terminate a $ 10 billion group of funds it managed with financier Lex Greensill. There were many red flags.
Bank executives knew early on that a large portion of the funds were linked to Sanjeev Gupta, a Greensill client whose loans were at the center of a 2018 scandal involving a competitive asset manager. GAM Holding AG. They were also aware that much of the insurance coverage on which the funds relied depended on a single insurer, according to a report. Credit Suisse even conducted an investigation last year into its funds that spotted potential clashes, but their collapse could not be prevented months later.
On Friday, the bank finally pulled the plug and said it would liquidate the strategy, a group of funding funds in the supply chain for which Greensill provided the assets and which was held as a success story. The funds, which have about $ 3.7 billion in cash and equivalents, will yield the bulk of it next week, and about two-thirds of investor money has been captured in bonds whose value may be uncertain.
The decision was a dramatic week that began when Credit Suisse froze the funds after a major insurer for its bonds refused to cover new notes. The movement has sent shock waves around the world Greensill Capital to look for a buyer for its operations, and forced competitor GAM Holding AG to conclude a similar strategy. For Credit Suisse and its new CEO, Thomas Gottstein, it is probably the most damaging reputation hit after a difficult first year in power.
Although the financial toll on the bank may be limited, investors in the fund spend about $ 7 billion locked up in a product that is offered as a relatively safe but better-performing alternative to money markets.
The Greensill-linked funds were one of the fastest growing strategies at Credit Suisse’s asset management unit, attracting money from yield-hungry investors in a region that has struggled with negative interest rates for years. The bank started the first of the funds in 2017, but they really started in 2019, the year when the competitive asset manager GAM finished winding up a group of bond funds that invested a large part of their money in bond related to Greensill and one of his early clients, Gupta’s GFG Alliance.
The Credit Suisse funds were also heavily exposed to Gupta early on. As the bank fueled the strategy, as of April 2018, the flagship supply chain financing fund had approximately one-third of its $ 1.1 billion in assets linked to Gupta’s GFG Alliance companies or its customers.
According to people familiar with Credit Suisse, they were aware at the time that it was an excessive risk. They argued that most loans were to Gupta customers and not directly to GFG companies, the people said, asking not to be identified because the information is private.
Over time, it appears that the share of loans linked to GFG and customers has declined, while new counterparties have emerged in the disclosure of funds that have packed loans to multiple lenders, making it more difficult to determine who the ultimate counterparty is. Many of the vehicles are named after roads and beacons around Lex Greensill’s hometown in Australia.
The fund’s executives also knew that much of the insurance coverage they relied on to make the funds look safe was dependent on just a single insurer, according to the Wall Street Journal. They considered requiring the funds to get coverage from a broader set of insurers, with no single company providing more than 20% of the coverage, but never implemented the policy, the newspaper said.
A spokesman for Credit Suisse declined to comment.
Greensill, meanwhile, has been looking for new ways to boost the growth of its trade finance empire following the collapse of GAM funds that removed a large buyer of its assets. In 2019, SoftBank Group Corp. stepped in and injected nearly $ 1.5 billion through its Vision Fund to become Greensill’s largest pillar. It has also made a huge investment in the Credit Suisse supply chain financing funds, with hundreds of millions of dollars, although the exact time is not clear.
Over the course of 2019, the flagship fund more than doubled, but soon questions arose about the complex relationship between Greensill and SoftBank that fueled the growth. The funds had an unusual structure in that they used a warehouse agreement to buy the assets of Greensill Capital, without any Credit Suisse fund manager conducting extensive investigations into it. Within the broad framework set by the funds, the seller of the assets – Greensill – basically decided who would buy the funds.
Credit Suisse is launching an internal investigation which finds, among other things, that the funds are extending large amounts of funding to other companies supported by SoftBank’s Vision Fund, which gives the impression that SoftBank is using it and its swing over Greensill to promote its other investments. . SoftBank withdrew its fund investment – about $ 700 million – and Credit Suisse revised the fund guidelines to limit exposure to a single borrower.
Greensill Exposure
Credit Suisse’s frozen funds linked to Greensill include SoftBank links
Source: Credit Suisse fund reports, positions from 21 January
Neither Gottstein nor Eric Varvel, head of asset management, or Lara Warner, head of risk and compliance, saw the need for deeper change. The bank reiterated that it has confidence in the control structure at the asset management unit.
Credit Suisse’s review at the time did not mention that Greensill had also extended the funding to another of its supporters, General Atlantic. The private equity firm invested $ 250 million in Greensill Capital in 2018. The following year, according to the Wall Street Journal, Greensill made a $ 350 million loan to General Atlantic with money from the Credit Suisse funds. The loan is currently being refinanced, a person familiar with the matter said.
A spokesman for General Atlantic declined to comment.
Shortly after the Credit Suisse investigation was completed, more red flags appeared. In Germany, regulator BaFin was investigating a small credit provider in Bremen that bought Greensill and got money from the SoftBank injection. Greensill used the bank effectively to pick up assets it acquired, but BaFin was concerned that too many of the assets were linked to Gupta’s GFG – a risk that Credit Suisse’s executives had incurred earlier.
Meanwhile, SoftBank has quietly begun to write off its investment in a miraculous reversal of a bet it made just a year earlier. By the end of last year, it had written off its interest significantly, and was considering lowering the valuation to zero, people familiar with the matter said earlier this month.
However, Credit Suisse emphasizes the success of the funds for investors. Varvel, the head of asset management, listed it in a December 15 submission as an example of the “innovative” and “higher-margin” fixed-income offerings the bank intended to focus on.
Balance jump
Greensill Bank has grown as its parent finances supply chains for financing
Source: Greensill Bank Annual Accounts, German regulator BaFin
By this time, Greensill already knew that a well-known Australian insurer called Bond and Credit Company had decided not to renew policies for $ 4.6 billion in corporate loans obtained by his firm. The policies would expire on March 1, resulting in a final attempt by the supply chain firm to take the insurer to court in Australia. On that day, a judge in Sydney rejected Greensill’s order and caused the series of events that have since reverberated worldwide.
According to Suisse, Credit Suisse only recently knew that the insurance would expire soon.
In an update to investors on Tuesday, Credit Suisse said that several factors had “cumulatively” led to the decision to freeze the funds, and that he was looking for ways to return cash holdings. But in a twist that could complicate the liquidation of the rest, he also said that Greensill’s German Bank was one of the insured parties and plays a role in the claim process, and that the bank was only closed by BaFin.
Many of the assets in the funds have protection to make them more attractive to investors who want an alternative to money market funds. However, the second largest of them, the High Income Fund, does not use insurance. It is also the fund with the least liquidity, with less than 20% of net assets in cash.
Credit Suisse said it was not aware of any evidence of financial irregularities with the documents issued by Greensill or by the underlying companies. The bank has not yet commented on how many of the assets in the funds are linked to Gupta’s GFG Alliance.
– Assisted by Melissa Karsh