Supply chain finance: Greensill’s business model By Reuters

By Abhinav Ramnarayan

(Reuters) – SoftBank-backed British fund Greensill Capital is in talks to sell large parts of its business after losing the backing of two asset managers who underpinned parts of its multi-billion dollar supply chain financing model.

WHAT IS SUPPLY CHAIN FINANCE?

Supply chain financing, often also referred to as reverse factoring, is a method by which companies can get cash from banks and funds such as Greensill Capital to pay their suppliers without having to dip into their working capital.

In a typical example, a company such as a supermarket chain, concerned about its small food suppliers during a temporary shock such as the COVID-19 pandemic, approaches its bank.

The small suppliers issue invoices to the supermarket, which confirms to the bank they are valid. Those suppliers then get their money right away from the bank, rather than having to wait 30 days or even months to be paid by the retailer.

At the height of the COVID-19 crisis, use of supply chain financing is reported to have hit a record high in Europe, with banking providers alone earning about $27 billion in fees, data from Coalition shows.

WHY IS IT UNDER SCRUTINY?

Supply chain finance does not have the same disclosure requirements applied to more conventional forms of debt.

Companies involved often say simply “we have an arrangement with suppliers for early payments” in their accounts, which provides the only real clue that they are effectively taking on potentially large amounts of debt to pay suppliers.

Often this does not come to light until a company runs into trouble, a risk that prompted credit ratings agency Moody’s (NYSE:) to liken supply chain financing to “tiger traps”.

Britain’s Carillion, Spain’s Abengoa and the United Arab Emirates’ NMC Health are high profile examples of companies which collapsed on the weight of debt, much of it undisclosed.

WHERE DOES GREENSILL FIT IN?

Founded by Lex Greensill, a former Citigroup (NYSE:) and Morgan Stanley (NYSE:) banker and adviser to the British government, Greensill is the largest non-bank provider of supply chain finance.

Its technology-driven approach has provided $143 billion of financing in 2019 across 10 million customers and suppliers.

In 2019, it secured $1.455 billion of funding over two rounds from SoftBank’s Vision Fund, one of the biggest venture capital funds in the world.

A spokesperson told Reuters in December that it saw volumes and new business increase in 2020 during the COVID-19 crisis.

But Credit Suisse (SIX:) and Swiss fund GAM this week suspended funds linked to Greensill, prompting it to say it was in talks about selling large parts of its business.