Friday Workout

Reverse Unicorns; Max Factor; the not so Beautiful Game

By Chris Haffenden | Editor |

Greensill dominated financial news headlines this week. Most stories focused on the rise and fall of Lex Greensill from a watermelon farmer into a FinTech billionaire – his links with Sanjeev Gupta’s GFG Alliance (reportedly €2bn of  €3.5bn loan book) - and his financial backers, most notably Softbank’s strange investment and Credit Suisse’s extraordinary $10bn of Fund exposure - with regulators once again ignoring what was hidden in plain sight. 

As Ernest Hemingway famously said - you go bankrupt two ways, “Gradually, then suddenly.”

It was disclosed in court hearings this week, that Asian insurers – which provide trade credit insurance cover for Greensill notified the supply chain lender as early as late July 2020 of their intention to withdraw lines. This meant that their policies would expire on 1 March. 

With The British Business Bank stripping Greensill Capital of its UK Government Guarantee on loans to Sanjeev Gupta’s GFG Alliance, due to breaches in CLBILS rules, the momentum was already building on Monday. 

German regulator BaFin then filed a criminal complaint for suspected balance sheet manipulation. Reports emerged that a UK pre-pack administration was lined-up with Apollo Global Management taking the better rated client business such as Vodafone and General Mills. The Australian TopCo Greensill Capital Pty Limited filed for Safe Harbour in Australia.

At 9fin Towers we decided to look beyond the more salacious aspects of the Greensill collapse and dive into the detail of what this means for the various Greensill stakeholders and the wider implications (if any) for LevFin borrowers. 

Using the Journalist 101: The Who, What, Why, When and How, hopefully we can answer the complaint from one of the commentators on the FT pages below:

Before we start, some acknowledgments:

The Financial Times Team led by Robert Smith (aka Bondhack) deserves a huge amount of credit for bringing the issues to light over the past couple of years. 

Stephen Clapham’s Beyond the Balance Sheet is an excellent starting point for those who want to get up to speed on Greensill. 

Muddy Waters work on another Greensill client NMC Healthcare is another notable mention.

I would also recommend Moody’s (albeit far too late in the day for Abengoa creditors) excellent 2015 report on Reverse Factoring

Reverse factoring is not a new concept. 

Traditional factoring involves the discounted sale of receivables. Reverse factoring - or more broadly ‘supply chain financing’ - arises where a financial institution agrees to pay the supplier for goods purchased by the company, usually on a date earlier than the original due date, and at a discount. The company then pays the financial institution at an agreed date, later than the original due date, sometimes with interest.

But Greensill took this a few stages further. 

It raised funds from outside investors such Credit Suisse Asset Management and GAM to utilise a warehousing facility which in turn funded its Supply Chain Finance Programme. 

Investors were promised HY-equivalent returns, with Greensill taking the first loss portion, which it insured via trade credit insurance. It also owned a German bank, Greensill AG which warehoused some of the assets, holding $1.47bn in assets, as at May 2019.

There were red flags over the quality of the loans and concentration risks (most notably to GFG Alliance), with Greensill-sourced supply chain finance funds from Swiss asset manager GAM, running into trouble as early as 2018. As Stephen Clapham noted, Greensill used €400m from Softbank’s $1.8bn investment in 2018 to recapitalise its German Bank. Five members of the management team resigned on a single day in January 2018, with another executive which started at the same time lasting just four weeks. 

Despite the negative news flow, Credit Suisse set up four funds from 2017, with demand so high the funds were frozen to new investors in 2019, with AUM rising from $2bn to $9bn. 

There are several glaring conflicts of interest. Softbank has reportedly invested in $500m in the CS Funds with four of the top five loan exposures being to Softbank companies. According to Bloomberg, Vodafone was also a significant investor (€1bn investment as at 2018) with their Treasurer subsequently leaving to become Greensil’s CFO. 

Lex Greensill was by this time a frequent visitor at meetings with UK government ministers - let’s hope he wasn’t involved in the PPE supply chain programme. 

What are the implications for the Credit Suisse and GAM Funds?

With Greensill taking the first loss piece, which is in turn covered by trade credit insurance, the funds in theory should be well covered. Without fresh lending, however, the assets will diminish fast and effectively the funds will be in run-off. 

Yesterday, Credit Suisse issued a Q&A for investors in which it said the current notes are covered until maturity. It adds that the funds have significant amounts of cash and cash equivalents and they are considering ways of distributing excess cash to investors. It said that the notes have not defaulted and were suspended due to valuation uncertainty. 

The latest CS fund exposure detailed holdings are somewhat outdated (April 2020) – and given the short-term nature of supply chain finance, it would be difficult to read across to the present day, but we did note the presence of financing lines to Iceland and Shop Direct in fund reports. The latter has admitted exposure, but adds that at £10m it is immaterial to the group’s working capital requirements. Iceland did not respond to a request for comment. 

We also note that the Credit Suisse Nova Lux fund has a skinny first loss absorption mechanism percentage – at just 1% of defaulted notes value (see below).

Impacts on the borrowers/suppliers

Some of the better borrowers, such as Vodafone and General Mills, should easily find other providers of reverse factoring facilities. Lesser-rated names, however, may struggle and/or may have to pay increased fees. Typically, administration fees on supply chain finance are slightly higher than RCF commitment fees, at 2-4%. Borrowers may now have to deal with an administrator as a debtor.  

Interestingly, Sanjeev Gupta is reported to have said that GFG Alliance will stop making payments to Greensill. According to the FT, documents at Companies house show Greensill taking additional security over GFG Alliance Australian Assets on Monday.  

Suppliers face no immediate losses but will be keen to negotiate tight terms with companies, if alternative providers cannot be found. But for some it may result in short-term liquidity issues.  

Greensill Insolvency 

Despite scare stories placed by Greensill’s lawyers that if the trade credit insurance policies are not renewed it could cause 50,000 job losses worldwide, the effects are likely to be less severe. The UK pre-pack is likely to create a GoodCo/BadCo – with the better assets, and residual lending assumed by Apollo. 

Shareholders, most notably Softbank are likely to be wiped out, and some of their company investments may face liquidity issues. For starters, I would take a look at Katerra, which escaped insolvency late last year, after Softbank injected a $200m lifeline. 

Wider implications

Greensill was linked to a number of significant business collapses in recent years, most notably NMC Healthcare, Carillion, Agritrade and Brighthouse

For the former, it filed for administration after $2.7bn of hidden off balance sheet loans were discovered. As short-seller Muddy Waters revealed in 2018, there was extensive use of reverse-factoring agreements, mostly with Greensill. There is a risk that more distressed borrowers will be uncovered in the coming days and weeks as further disclosures are made.  

Used in combination with traditional factoring, to get cash from receivables sooner, any extension of these arrangements could offer early warning signs of those facing liquidity issues or masking declining operations with a short-term boost to cash positions and lower reported debt figures. Abengoa is a prime example, using factoring extensively and other off-balance financing prior to entering into financing restructuring in 2015. 

For many companies, however this is just prudent working capital management. 

The issue that many detractors have with reverse factoring is the accounting treatment and lack of transparency, with no need for companies to disclose its use, with many hiding it in their trade payables, boosting their ROI and reducing their debt levels. 

Over what time period do you think it should be treated as debt – over 180-days?

As 9fin’s Huw Simpson states in his excellent report – Who’s Been Reverse Factoring:

“In and of itself, the practice makes sense - you don’t have to pay your supplier for a bit longer and you can keep that money to fund operations or investments. Concern arises where the use of this practice becomes unsustainable and hides a mounting debt problem - this is compounded by limited disclosure requirements.”

Not only do reverse factoring facilities run the risk of having to be unwound in the long run, they also rely on the financial institution providing the funding to play its part. Withdrawal of that support can have clear consequences for firms unable to find alternate sources of funding.

First used by big aerospace and manufacturing companies to help provide working capital for smaller companies with weaker credit profiles, the procedure has now become more ubiquitous, and equally underreported. Bank credit lines for reverse factoring are in most cases uncommitted, so can be withdrawn at short notice. Loss of this arrangement increases working capital requirements, weakening liquidity.

9fin’s report uses our document search to identify companies in European High Yield who have taken advantage of supply chain financing or reverse factoring. 

For a copy, please email

Due to murky reporting, we will look further into lengthening payables days as a potential indicator of the increased use of reverse factoring in our next edition of ‘working hard or hardly working’ – a quarterly review of working capital dynamics in European HY. 

Grasping the Frying Pan by the Handle

There is a Spanish saying: you need to grab a frying pan by the handle. This was used in a local press article on Abengoa’s recent insolvency filing, google translate almost got it right:

Last week, Abengoa finally ran out of time and filed for insolvency. Abenewco subsidiary is where the action is, with the lenders seeking to exercise guarantees at Double LuxCos to gain control, before an insolvency administrator is appointed to the Spanish entities (candidates have until March 12 to submit). Ashurst have a good primer on difficulties on enforcement in Spanish Insolvency. We suspect that the structure was put in place just for this purpose. 

Arguably, its 2015 insolvency left far too much debt in the business. Ironically, its March 2019 accounts finally landed on February 21, 2021 – a year after the deadline and still not signed off by auditors PwC. I side with Wolf Richter on this one. 

Abengoa is reportedly seeking funds from SEPI, the €10bn Spanish Government fund for strategic businesses. But as this local article explains, it may fall foul of EU regulations, as companies with leverage over 7.5x for two consecutive years cannot receive bailouts. 

But the Spanish Government may be amenable to stretching the rules. 

This week SEPI finally agreed to provide €120m to Duro Felguera, which has arguably been insolvent for years. Details haven’t been disclosed, but we suspect that there will be heavy conditions attached around governance and jobs. 

The not so Beautiful Game

Success in Football is mostly about which team has the most money.

But until recently the role of leverage finance in their funding – with the exception of Manchester United’s High Yield bond – had passed me by. I used to rely on the excellent Swiss Ramble – a former financier who provided excellent blog posts and detailed analysis of European Football Clubs. But he has been quiet of late. 

In the UK, the role of Michael Dell’s hedge fund MSD UK Holdings in funding of clubs has caused some disquiet. Recently, ALK Capital bought Burnley FC for a reported £170m, but a recent Guardian article says that it has loaded up the club with MSD debt and left it £90m worse off

Older football fans may remember the nightmare for Coventry City fans, when Finnish Hedge Fund SISU Capital bought the club in 2007. Coventry have lost their ground (mortgaged to SISU) and now play 38-miles away at Birmingham City’s St Andrews. On the field, they clawed their way back from league Two in 2017, to the Championship in 2021, three points above relegation. 

Unfortunately, as TV revenues and Media Rights soar, the role of gate receipts and the connection of clubs with their fans is diminishing. But the pandemic has caused a hole in club finances. 

Inter Milan in their conference call last Friday, said that they are looking for €50-60m in liquidity at TeamCo to plug lost gate revenues, with players agreeing to deferments on their salaries. It was widely reported that lenders were being pitched in early January by Goldman for fresh financing and to refinance €375m of notes maturing in December 2022. 

On the pitch they are top of Serie A, but they have failed to make a €43m payment on the Romelu Lukaku transfer from Manchester United, which could mean the loss of players to compensate, say local press reports.

The Inter Milan bonds have decent protection, sitting at MediaCo they get first pass of TV revenues and sponsorship. This has supported the bonds, which remain in the high 90s. There is also a possible change of control, with Chinese owner Suning  looking to sell its 68.5% stake – but there was a big bid/ask with potential buyer BC Partners bidding €750m to the €1bn offer. But reports today, suggest a deal (details undisclosed) is close.

Another Private Equity consortium – CVC, Advent and FSI - is looking to buy into the media business of Serie A, the Italian Football League for €1.7bn, but this requires agreement from at least 14 of the 20 clubs, and the process has been dragging on for months. 

If you want to get a flavour of the inflation in football wages and the value of media rights the recent disclosure of Leo Messi’s salary at FC Barcelona will take your breath away. In 2017 the GOAT signed a new contract with a €115.5m signing-on fee, a €77.9m loyalty bonus, paying €138m per season. Arguably Messi is the club’s biggest asset and biggest liability and tried to leave last summer before backtracking. This summer, at the end of his contract, he can walk away for nothing.

But a report in El Confidential in late February, has said that Barcelona has asked Goldman and funds Amundi, Allianz, Prudential and Barings for forbearance and to extend upcoming payments for one year. In 2018, Prudential and Barings lent the club another €140m over five years to fund transfers, according to local reports.

Other 9fin content 

Ahead of a likely extended forbearance request from its lenders, Nordic Aviation Capital faces more returned aircraft to remarket. Garuda Indonesia issued a unilateral termination on 12 NAC-owned CRJ1000’s on February 1, 2021 and another lessee, Czech Airlines filed for restructuring on February 26, 2021. 

Hurtigruten has increased its borrowings and reduced the amount of restricted cash to boost liquidity ahead of a resumption of travel which should “resume gradually in Q3 2021.”

In December it signed a €60m letter of credit operating facility to release the same amount of restricted cash, and today (1 March) a new €46.5m term loan facility paying E+800bps. In total it now has €80m of cash and €6m of restricted cash, which are “sufficient to ensure the funding of the Hurtigruten group through the expected time-frame of the covid-19 pandemic and allow it to be well-positioned for the recovery.”

After gategroup ruling, what next for UK Restructuring Processes?  As reported, the landmark ruling has created a lot of angst amongst advisors. Our latest article looks at the impacts and potential ways to mitigate difficulties in recognising UK processes. The use of local rules, interlocking dual processes, or more creative solutions involving US Chapter 15 and other jurisdictions such as Ireland as a bridge to Europe are all being considered. 

Ahead of today’s CGG earnings update, the French seismic testing and imaging processing company was the subject of our latest Deep Dive analysis. The group needs to take advantage of an extremely favourable refinancing market to refinance over $1.2bn of debt, before an expected downturn in capex spending from upstream energy producers amid diminishing liquidity. Today CCG said that it hoped to be cash flow positive next year, but that improvements in revenues over 2020 would be in the single-digits as expenditure from E&P producers remained subdued.  

In brief 

Europcar announced the completion of its Restructuring this week.

Norwegian Air announced the cancellation of aircraft orders from Airbus and the cancellation of 36 aircraft leases

Intu SGS has released its December quarterly report. The total market value of the four shopping centres decreased by c.40% from £1,276m (A) at 30 June 2020 to £754m (B) as at 31 December 2020, driven by significant reductions in ERVs and yields widening. 

Wirecard launched a consent solicitation for bondholders

What we were reading this week

With concerns over the certain parts of the commercial real estate market some investors are focusing on Beds, Sheds and Meds 

Wolf Richter makes some interesting observations on Bitcoin and how its players need to find more entrants into the casino - how this makes it a store of value and means of exchange is beyond me

For the older football fans who had to endure the long-ball game, someone to blame

9fin is an enthusiastic adopter of Clubhouse - with its Friday ‘Lenders of(f) the Record - and uses Substack newsletter format as a means of engaging beyond our subscribers. Arguably they are better suited as medium platforms than Facebook and Twitter - Social media moves beyond the feed. 

Another topic on this week’s Clubhouse is the recent rise in Treasury Yields and  potential effects on markets. The sharp move in 10-year yields has spooked overbought equity markets, but will this turn into a rout. Is Inflation the Fed’s Kryptonite?

As this excellent NY Times Article outlines, the club is in a deep financial crisis. The current ground is falling apart and has little corporate hospitality to boost revenues. Goldman Sachs has arranged €815m financing for a stadium refurbishment repayable over 25-years, which hopes to boost annual revenues by €128m.