Greensill case shows risks of supply chain finance

Financial intermediaries have been stepping in to smooth the relationship between buyers and sellers of goods for centuries. As that help takes increasingly sophisticated forms it amplifies both the benefits, and the potential risks. Greensill, now preparing to file for insolvency, is the latest in a string of corporate breakdowns to train the spotlight on the latter. Unless regulatory oversight is stepped up, it will not be the last.

The practice of a supplier selling on invoices to a middleman who takes over collecting payments from buyers, known as factoring, is long-entrenched. “Reverse” factoring, or supply chain financing, flips things round: a buyer — often a large business — agrees with its suppliers that they will be paid by an intermediary, so they receive payments more quickly but at a small discount. The business later pays the full sum to the finance provider.

Greensill is among those that have added a new spin to the practice, by arranging funding for companies not just through a bank it owns in Germany but by packaging supplier bills into bond-like investments that are sold to investors. In Greensill’s case, one of the biggest buyers has been Credit Suisse — which on Monday suspended $10bn of funds linked to assets that Greensill originated. Its founder, Lex Greensill, cultivated political contacts in the UK and his native Australia, and successfully pitched to bring his supply chain financing methods into public-sector contracts and procurement.

Proponents say supply chain finance helps companies to optimise cash flow. Some businesses have pushed out payment terms from 60 to 90 days in the past to 180 or 210, or more. Critics say small suppliers end up having to pay a fee simply to get paid promptly.

But accountants, regulators and rating agencies have already raised alarms. Under accounting rules, companies using such facilities do not have to classify them as debt — though money is owed to a bank or finance provider — but can book them in the “accounts payable” line on a balance sheet. That can be used to mask spiralling de facto corporate borrowing.

Indeed, use of such facilities has been a feature in several corporate implosions — including Abengoa, a Spanish clean energy business, and NMC, the healthcare provider, which both used Greensill’s services. Carillion, the building and services group that collapsed in 2018, was not a Greensill client, but was a big user of the UK government-endorsed supply chain finance programme, which Lex Greensill helped to devise as an adviser to the then prime minister David Cameron. MPs investigating Carillion’s collapse said the scheme allowed the outsourcer to “prop up its failing business model”.

It is clear that accounting rules need to change. Supplier finance facilities ought to be classified as debt, and greater regulatory oversight is needed both of companies drawing on them, and groups providing the financing. There should be more enhanced scrutiny, too, of funds investing in the financial products. Illiquid bonds that Greensill structured for the steel magnate Sanjeev Gupta’s GFG Alliance lay at the heart of a 2018 scandal at GAM, the Swiss fund manager.

The affair also highlights once again the need for careful surveillance of financial technology groups. Like the now insolvent Wirecard, Greensill owns a bank in Germany but the parent group is not regulated like a bank. Regulators cannot prevent as yet unknown hazards popping up in new forms of finance. But the risks of supply chain financing — whatever advantages it also bestows — are now known, and should be acted upon.