March 8th 2021: With the Greensill case dominating the news with regards to Supply Chain Finance, the Founder and CEO of Capital Chains Steven van der Hooft was invited to share his views on the BBC5 Live radioshow ‘Wake up to Money’.
Listen to this interview here, or read the full excerpt of the interview further down below.
You may have noticed if you have been flicking through the financial pages over the last few weeks, I mean the budget dominated a lot of headlines last week. But there has been a company called Greensill getting a lot of attention and not in a good way either. It is feared that this major lender based in London, it’s a backer of the UK steel industry as well, could be placed in administration in the next few days.
Now, Greensill is a company that specialises in supply chain credit. And it actually loaned a lot of money to Sanjeev Gupta’s GFG alliance. If you are thinking sounds familiar, well Sanjeev Gupta was who we have been talking to a lot on ‘Wake up to Money’, about buying those plants, steel plants across Rotheram, Stockbridge, Newport, Hartlepool. Greensill itself also has a tech facility in Warrington, the issues and its tentacles stretch far and wide. Financial Times reporting this morning that the European Central Bank has asked lenders around Europe for details of their exposure to Greensill. Unions in the UK are going to be holding talks with mr Gupta this week it seems.
I have got Steven van der Hooft with me, founder and chief executive at Capital Chains in the Netherlands, which is a Supply Chain Finance consultancy. Morning to you Steven!
Good morning, thanks for having me. – Thank you for being with us. We start at the beginning really with this: Supply Chain Finance or supply chain credit, what is it exactly where is it used?
So Supply Chain Finance is used across the globe, typically and primarily at the moment still by larger corporates and what it effectively does is it has a buyer and their suppliers and then there will be one funder to that program. Where the buyer will approve invoices coming from its suppliers and effectively tell the funder: “I am going to pay these invoices in 30-60-90 days”. That, in turn, enables the funder to provide early payment facilities to the suppliers who will be able to benefit from the credit rating and the strength of the credit risk of the buyer.
So this is about money going to those suppliers, sooner than it might if they were reliant on the person, the business, that they are supplying to cough up. – Yes!
So that is how it works, now we have got Greensill which is this massive company, valued at 7bn USD not that long ago. So what has happened at Greensill?
So, when I was explaining the standard Supply Chain Finance, right, that has been around for decades and that was primarily the space of the bigger banks playing in it. What Greensill did is, they kind of disinter-mediated the relation between the funder and the anchor corporate and they allowed other investors to come in as well. So, what they would do is they would originate a couple of these deals through an Special Purpose Vehicle [SPV], meaning they would have an entity that was effectively financing these transactions and on the back of that they would then credit insure this SPV and sell notes to other investors in the market.
So you can see how this gets very complicated very quickly. From a straightforward idea like Supply Chain Finance to the various financial, I was going to use the word trickery there, but that maybe is a bit harsh for those that are doing it very smoothly, financial approaches that make things very complicated very quickly.
If we just use these steel companies, and GFG alliance, Sanjeev Gupta’s GFG alliance as an example. What role do Greensill have between the suppliers of those plants, and the business GFG Alliance themselves?
There is two alleys in which there could be a reliance. One is where they would just facilitate the early payment to suppliers. Which in turn would enable GFG to have longer payment terms towards suppliers, because those suppliers would not necessarily be hit by those longer payment terms, because they previously enabled the early payment. The other situation, and that is where Greensill is let’s say doing more then some of the other funders did, is where they take future receivables as part of the deal and try to discount that to today. – What does that mean future receivables?
So they would look at what is going to happen, discount that to today [or at least partly discount that to today] and create a value out of that, and with that money then try to invest. So they will use similar structures of either current receivables or payables, or future payables or receivables and say well we can discount that to today, create a value out of that, put a credit insurance on top of it, and find investors who are looking for a yield. Which is quite a regular structure, the only thing is if those investors do not know who they are investing in and at some point the credit insurance lapses, you are left with an investor who is looking for a yield with an asset which does not have that same yield. And they will pull out!
I’ll tell you what Steven, you have to almost plot a family tree style thing here to see who’s got fingers in which pies. It reminds me so much of the conversations in the run up to and during the financial crises. Where a simple thing like mortgages which we all understood, was then repackaged a 100 times over and resold as different kinds of products and people lost track of the value of these things. And it all went part I mean does that seem like a fair comparison? – I have used that same comparison.
The important thing here is to mention, and that I see as my role a bit as well, is to educate people on the fact that Supply Chain Finance in itself is a perfectly positive way of financing. And especially now in covid-19 where smaller entities will have difficulties restarting their companies, because they have got no inventory left, they have got no accounts receivable left, they have got very little collateral to put up for new loans to start the production again. Supply chain finance could really help them! So Greensill is not Supply Chain Finance, they were doing a bit of SCF, but they took out the relation part. And I think the relation part from the funder perspectives is super important. They know who you are and they need to stick with you. And I think in this case we took out the relationship part.
Steven van der Hooft there, founder and chief executive at Capital Chains in the Netherlands, a Supply Chain Finance consultancy. We got in touch with Greensill for comment, we’ll let you know what they say when we receive it. GFG alliance said: “it has adequate current funds and its plans to bring in fresh capital through refinancing are progressing well a global efficiency drive means that our core businesses are operationally strong and improving.”