Insurance Risk at the Core of Greensill Capital’s collapse
‘Wiped out’ is the term used to describe the status of investments in Greensill, a company that advanced payment to suppliers on their invoices at a slight discount on behalf of their customers while recouping the full amount from the customers at a later date, a practice known as supply chain finance or reverse factoring.
When Greensill advances payment for a supplier’s invoice, it is essentially lending to the customer (borrower). Greensill however did not take in the loans on its own balance sheet like a traditional lender, instead it packaged them and sold them to investors like Credit Suisse and GAM. Investors were comfortable with investing in the loans because Greensill was buying Credit Insurance policies from large and creditworthy insurers that would pay Greensill in the event a customer (borrower) does not pay or delays payment to Greensill. The main insurance companies were The Bond & Credit Co. (BCC), Insurance Australia Group (IAG), and QBE, of which reinsurers include HannoverRe and SCOR. Greensill’s latest insurance broker was Marsh.
Insurance companies decided to non-renew existing Credit Insurance policies, which meant that the creditworthiness of the loans that were packaged to investors would drop significantly. In turn, investors would have to adjust the valuation of their investments to reflect the substantially higher credit risk involved, and which would make such investments fall outside of their investment mandates. Credit Suisse decided to ask Greensill for early repayment of its funds which prompted a liquidity crisis for Greensill thereby accelerating its demise.
Greensill Capital filed for insolvency on March 8, 2021.
Here are some highlights:
• Former UK prime minister David Cameron was an advisor to Greensill
• Softbank invested ~ $1.5 Billion into Greensill
• >$4.5 Billion worth of Credit Insurance was non-renewed
• Credit Suisse had exposure of ~ $10 Billion and as a result suspended bonuses for several executives in its asset management arm
• >50,000 jobs are at stake of being lost due to the ripple effect of Greensill’s collapse
• Greensill’s technology is said to be sold to Apollo Global Management for $60 million
• Tokio Marine, a Japan based insurer, had acquired BCC in 2019
The story of Greensill Capital is a prime example of the overlap between Insurance Risk, Credit Risk, and Investment Risk, on which you can find more information on our Products Page.