Swiss finance entangled in Greensill debacle

The German regulator has stepped in to stop operations at Greensill Bank, which is part of the collapsed group. Keystone / Focke Strangmann

Credit Suisse and GAM Investment Management are two Swiss actors caught up in the collapse of British-based financial services group Greensill Capital.

The fallout for both companies threatens to be serious, as do the consequences for Greensill investors and numerous industrial firms in various countries.

What is Greensill?

The insolvent Greensill Capital paid the debts that companies owed to suppliers – for a fee. 

“Supply chain finance” greases the wheels of industry. Company A owes Supplier money, so asks Financier to take care of this debt. In exchange for quick payment, Supplier accepts that Financier will not pay the invoice in full. Financier later collects the full amount of the invoice from Company A and pockets the difference.

Greensill also created financial instruments out of these debt obligations that would be sold on the financial markets.

Where does Switzerland fit in?

Switzerland’s second largest bank was a key backer to Greensill. It set up numerous funds that channeled billions of francs of client’s money into the supply chain finance scheme. It has now been forced to shut down these funds and needs to reimburse its clients.

Credit Suisse also loaned Greensill $160 million (CHF149 million) when the company started to run into difficulties. With Greensill going through bankruptcy proceedings, it is unclear how much of this loan the bank will get back.

Swiss asset management firm GAM Investment Management has also been drawn into the unfolding affair, having facilitated the activities of British steel baron Sanjeev Gupta in the Greensill scheme.

What went wrong?

The full details of Greensill’s collapse have yet to come out but the scheme appears to have overstretched itself by taking on too many risky loans. It also appears to have been too highly exposed to Gupta’s businesses.

And then the pandemic struck, severely contracting global trade and putting many companies into financial difficulties.

The tipping point came when Greensill’s main insurer refused to continue covering losses. The group filed for insolvency in Britain on March 8.

What’s the fallout?

There are very serious and wide-reaching ramifications of Greensill’s collapse. The German-based Greensill Bank, part of the group, has been forced to stop operations, threatening the deposits of several German municipalities. It is also unclear how the liquidator will unravel the complex series of debts between companies and suppliers.

Far from greasing the wheels of industry, the collapsed scheme may throw a spanner in the works of many small firms. In Britain, this includes the Guptill Family Group (GFG) of industrial firms linked to Sanjeev Gupta’s business empire.

Japanese investment group SoftBank is also fretting about its $1.5 billion stake in Greensill.

The prospects of Credit Suisse retrieving all of its $160 million loan do not look rosy. But perhaps the biggest damage will be to the bank’s reputation as it failed to properly assess the risk of its Greensill operations. The bank has removed key managers from their roles and now has to find a way of getting at least $10 billion from its terminated funds back to investors. Shares at the bank have been driven lower as the scandal unfolds.

GAM also has some searching questions to answer, not least from the Swiss financial regulator FINMA that has confirmed it is in contact with GAM, Credit Suisse, and regulators in other countries. The authorities in some countries are investigating the possibility of fraud linked to the collapsed Greensill business.