Why Greensill’s collapse could spell calamity for Gupta’s steel empire
Australian financier Lex Greensill’s financial empire has collapsed just a year after seeking a $7bn valuation.
On Monday Greensill Capital filed for administration and it risks taking Sanjeev Gupta’s steel empire down with it.
What went wrong for the banker and the steel magnate and how will its demise affect thousands of British steel jobs?
What is Greensill Capital and what does it do?
Greensill Capital is the brainchild of former Citigroup and Morgan Stanley financier Lex Greensill and it employs former PM David Cameron as an adviser.
The company was backed by Softbank’s Vision Fund with $1.5bn back in 2019.
Greensill Capital specialises in supply chain finance which essentially lets businesses borrow money to pay suppliers. This type of finance – also known as factoring – claims to lower costs and improve efficiency by providing short-term credit to businesses.
Suppliers sell the debts their customers owe them to a third party at a discount which then collects the full amount when it’s due. Greensill bundled this debt and sold it to financial markets on a massive scale including to fund management groups like Credit Suisse.
Greensill’s problem was it relied heavily on insurers to provide cover for the debt.
What led to it crashing into insolvency?
On Monday the finance firm appointed Grant Thornton as its administrators, warning it is in “severe financial distress”, but Greensill’s issues have been mounting for some time.
Last year the German regulator Bafin started investigating Greensill’s exposure to steel magnate Sanjeev Gupta after Greensill was hit by a number of its clients defaulting on their debts, including NMC Health.
It meant the finance firm and a group of insurers were forced to cover the losses in funds managed by Credit Suisse.
In Australia Greensill lost a legal battle to get its insurer Bond and Credit Company to extend its insurance beyond 1 March. This led to Credit Suisse suspending redemptions on a $10bn suite of Greensill-linked funds.
It is now liquidating the fund and returning money to investors while Swiss asset manager GAM Holding has also announced the closure of its Greensill-linked funds.
What’s this got to do with a steel company?
One of Greensill’s biggest clients was Gupta, the Indian-born British businessman behind industrial conglomerate GFG Alliance.
Since entering the UK in 2013, Gupta has snapped up steelworks around the country, many of which were facing closure, and placed them under the aegis of the Liberty Steel brand. This led to him being nicknamed the “saviour of steel”.
As one of Gupta’s main financial backers, Greensill was central to this rapid acquisition spree. According to the FT, when it went into administration Greensill had about $5bn of exposure to GFG, which is now starting to default on repayments.
Documents from yesterday’s court hearing show that GFG had warned Greensill that if it ceased to provide it with capital it would collapse, threatening thousands of jobs.
How many jobs are at risk in the UK?
Around 35,000 people are employed across Gupta’s empire, which has operations across 30 countries.
In the UK, it owns 11 sites which directly employ 3,000 people, with a further 2,000 people working in related engineering roles.
The sites, which are spread around the country, include plants at Newport and Tredegar in south Wales, Stocksbridge, Rotherham, and Scunthorpe in the Midlands, Hartlepool on Teeside and Dazell in Scotland.
In Europe, it controls seven steelworks and five fire services businesses, which employ a combined 14,000 people.
It employs 6,500 more workers in Australia and a further 1,500 in the US.
What steps are being taken to save them?
Since Greensill finally fell over yesterday, Gupta has embarked on a series of meetings with trade unions and ministers to reassure them that GFG has adequate financing.
Earlier this week Community, Unite and GMB all met with Gupta, at which the tycoon told them he intended to “secure a refinancing of the debt to provide the business with the necessary liquidity going forward”.
However, representatives for the unions also called on the government to take an “active role to facilitate a comprehensive solution that safeguards the future and protect jobs”.
Today, Gupta told staff in an internal message that he was seeking a “standstill deal” with Greensill’s administrators Grant Thornton.
This would “put on hold arrangements between the two parties and allow both sides more time to assess and negotiate next steps”, he said.
In the meantime, he added, GFG was “implementing careful plans to make these businesses more financially sustainable by working with management, unions, customers, and suppliers to boost cash flow”.
Senior execs at Liberty Steel also met with business secretary Kwasi Kwarteng on Sunday.
A number of concerned MPs have also called on ministers to step up to save jobs, including Miriam Cates, Tory MP for Penistone and Stocksbridge.
Around 800 people are employed at Liberty’s plant in Stocksbridge, which is reportedly the most under threat by the cash crunch.
She said she was meeting Kwarteng for a second time tomorrow to discuss the issue.
And what fate awaits Greensill now?
Before Greensill formally appointed administrators there had been reports Athene and US private equity giant Apollo were eyeing parts of the business.
Administrators Grant Thornton said it is in “continued discussion with an interested party in relation to the purchase of certain Greensill Capital assets.”
Monday’s court filings reveal Grant Thornton has in principle agreed to sell Greensill’s intellectual property and technology platform for processing client payments for $60m.