Photographer: Markus Hibbeler / Bloomberg
Photographer: Markus Hibbeler / Bloomberg
Long before Credit Suisse Group AG was forced to liquidate a $ 10 billion group of funds it managed with financier Lex Greensill. There were many red flags.
Bank executives knew from the outset that a large portion of the fund’s assets were tied to Sanjeev Gupta, a Greensill client whose loans were at the center of a 2018 scandal with rival asset manager GAM Holding AG. They were also aware that much of the funds’ insurance coverage depended on a single insurer, according to a report. Credit Suisse even conducted an investigation last year of its funds that detected potential conflicts of interest, but failed to prevent its collapse months later.
On Friday, the bank finally hung up and said it would liquidate the strategy, a group of supply chain finance funds to which Greensill had provided the assets and which was considered a success story. The funds, which have about $ 3.7 billion in cash and cash equivalents, will begin to repay most of it next week, leaving about two-thirds of investors’ money tied up in securities whose value may be uncertain.
The decision ends a dramatic week that began when Credit Suisse froze the funds after a major bond insurer refused to provide coverage for new notes. The change sent shock waves across the world, taking Greensill Capital seeks a buyer for its operations, and forced rival GAM Holding AG to close a similar strategy. For Credit Suisse and its new CEO Thomas Gottstein, it is without a doubt the most damaging reputation blow after an already difficult first year in office.
While the bank’s financial tax may be limited, fund investors are left with about $ 7 billion stuck in a product that has been touted as a relatively safe, but higher-yielding alternative for the financial markets.
The funds linked to Greensill were one of the fastest growing strategies in Credit Suisse’s asset management unit, attracting money from hungry investors in a region that for years had to deal with negative interest rates. The bank started the first of the funds in 2017, but they really took off in 2019, the year in which rival asset manager GAM ended the liquidation of a group of bond funds that had invested a large part of its money in bond-linked securities. Greensill and one of his first customers, Gupta GFG Alliance.
Credit Suisse’s funds were also heavily exposed to Gupta from the start. As the bank stepped up its strategy, the main supply chain financing fund had about a third of its $ 1.1 billion in assets in notes tied to Gupta’s GFG Alliance companies or their customers in April 2018, according to with an archive.
Credit Suisse executives were aware, but at the time they denied that it was an extraordinary risk, according to people familiar with the matter. They argued that most of the loans were to Gupta customers and not directly to GFG companies, people said, asking not to be identified because the information is private.
Over time, the proportion of loans linked to GFG and clients seemed to decrease, while new counterparties appeared in the disclosures of funds that bundled loans to multiple borrowers – making it more difficult to determine who the final counterparty is. Many of the vehicles are named after roads and landmarks around Lex Greensill’s hometown in Australia.
Fund executives also knew that much of the insurance coverage they depended on to make the funds look safe depended on just one insurance company, according to the Wall Street Journal. They considered requiring the funds to guarantee coverage for a broader set of insurers, with no company providing more than 20% of the coverage, but never implemented the policy, the newspaper said.
A Credit Suisse spokesman declined to comment.
Meanwhile, Greensill was looking for new ways to fuel the growth of his commercial finance empires after the collapse of GAM funds removed a large buyer from its assets. In 2019, SoftBank Group Corp. intervened, injecting nearly $ 1.5 billion through its Vision Fund to become Greensill’s biggest financier. It also made a major investment in Credit Suisse’s supply chain financing funds, putting in hundreds of millions of dollars, although the exact timing is unclear.
Throughout 2019, the flagship fund more than doubled in size, but doubts soon emerged about the intricate relationship between Greensill and SoftBank that fueled growth. The funds had an unusual structure, as they used a storage agreement to buy Greensill Capital’s assets, without any Credit Suisse fund manager doing extensive due diligence on them. Within the broad structure defined by the funds, the asset seller – Greensill – basically decided what the funds would buy.
Credit Suisse initiated an internal investigation that found, among other things, that the funds had extended large amounts of financing to other companies supported by SoftBank’s Vision Fund, creating the impression that SoftBank was using them and its influence on Greensill to sustain its other investments. SoftBank withdrew its investment in funds – about $ 700 million – and Credit Suisse revised the fund’s guidelines to limit exposure to a single borrower.
Greensill Exhibition
Credit Suisse’s frozen funds linked to Greensill include links from SoftBank
Source: Credit Suisse fund reports, positions on January 21
Neither Gottstein nor Eric Varvel, head of the asset management unit, or Lara Warner, head of risk and compliance, seemed to see the need for more profound changes. The bank reiterated that it trusts the control structure of the asset management unit.
Credit Suisse’s analysis did not mention at the time that Greensill had also provided financing to another of its sponsors, General Atlantic. The private equity firm invested $ 250 million in Greensill Capital in 2018. The following year, Greensill made a $ 350 million loan to General Atlantic, using money from Credit Suisse funds, according to the Wall Street Journal. The loan is being refinanced, said a person familiar with the matter.
A spokeswoman for General Atlantic declined to comment.
Shortly after the completion of the Credit Suisse investigation, more red flags appeared. In Germany, regulator BaFin was looking for a small creditor based in Bremen that Greensill had bought and sustained with SoftBank injection money. Greensill was using the bank effectively to store the assets he acquired, but BaFin was concerned that many of those assets were linked to Gupta’s GFG – a risk that Credit Suisse managers, in turn, had previously dismissed.
SoftBank, meanwhile, was quietly beginning to drop its investment, in an impressive reversal of a bet it had made just a year earlier. At the end of last year, it had substantially lowered participation and is considering reducing the rating to almost zero, people familiar with the matter said earlier this month.
Credit Suisse, however, highlighted the success of the funds for investors. Varvel, the head of asset management, listed them in a December 15 presentation as an example of the “innovative” and “higher margins” fixed income offerings the bank was planning to focus on.
Swing jump
Greensill Bank has grown as its parent seeks supply chains to finance
Source: Annual accounts of Greensill Bank, German regulator BaFin
At that time, Greensill already knew that a little-known Australian insurer called the Bond and Credit Company had decided not to renew policies that covered $ 4.6 billion in corporate loans that his company had taken out. The policies were due to expire on March 1, leading to a last-ditch effort by the supply chain company to take the insurer to a court in Australia. That day, a judge in Sydney overturned Greensill’s injunction, triggering a series of events that have since reverberated around the world.
Credit Suisse did not know until very recently that insurance was about to expire, according to a person familiar with the matter.
In an update to investors on Tuesday, Credit Suisse said several factors “cumulatively” led to the decision to freeze the funds, and that it was looking for ways to return the cash. But in a turnaround that could complicate the settlement of the rest, he also said that Greensill’s German bank was one of the insured parties and plays a role in the claims process, and that the bank has just been closed by BaFin.
Many of the funds’ assets have protection to make them more attractive to investors looking for an alternative to money market funds. However, the second largest, the High Income Fund, does not use insurance. It is also the fund with the least liquidity, with less than 20% of the net equity in cash.
Credit Suisse said it was unaware of any evidence suggesting financial irregularities with the papers issued by Greensill or the underlying companies. The bank has not yet commented on how many of the funds’ assets are linked to the Gupta GFG Alliance.
– With the help of Melissa Karsh