Although the collapse of Greensill Capital won’t impact the availability or demand for traditional supply chain finance, it has turned the spotlight on the sector and holds important consequences for transparency and investor appetite for the asset class. Supply chain finance allows businesses to receive early payments on their delivered goods and services, providing a working capital lifeline, particularly in one of the most testing trading periods on record. Typically, the process involves a supplier bundling buyers’ receivables and selling them to a bank. The receivables are distributed amongst banks which onboard suppliers to software which notifies them when their payable is ready, allowing them to finance the gap between the buyer receiving the goods and the point the payment is due.
Greensill’s traditional supply chain finance business has already gone to other banks, and companies in the chain are unlikely to be left stranded. Taulia, Greensill’s technology partner, has secured more than US$6bn in funding from a financing consortium led by J.P. Morgan (plus European lenders UniCredit, UBS and BBVA) who will pick up the supplier invoice information. Companies on the platform may experience a couple of weeks’ delay, but that is only a small interruption for such a big noise, says industry expert Michael Vrontamitis. “The fact that there is only a small interruption to the funding cycle proves the resilience of the product.”
SCF: not receivable finance
It leads Vrontamitis to underscore the difference between plain vanilla supply chain finance from the riskier side of Greensill’s operations - financing future receivables or predicted sales not yet written. “Future receivables isn’t a product associated with trade finance,” says Vrontamitis. From a letter of credit to receivable finance or invoice finance, all rely on the underlying trade documents being presented to the bank to get the finance. “This is why it’s self-liquidating and why it’s low risk,” he says. For sure, some short-term contracts in a borrowing base might have been written and agreed with the goods delivered, but not invoiced. Elsewhere proforma invoices, where the price is based on a formula but the shipment has happened can be part of a receivables transaction, but these are not really future receivables in the way described in the Greensill case, he says.
But the reputation of traditional supply chain finance has still taken a hit from the fallout as investors in the asset class look more closely at the true nature of the risk in their trade finance exposure. Supply chain finance assets are packaged into investment funds and sold (as per clients of Credit Suisse Asset Management and fund manager GAM in the Greensill case) as low risk, short dated, quality assets. Yet Greensill packaged up securities into vehicles that included risky allocations with not just receivables but also future receivables. “It will trigger more investor demand for transparency in terms of asset securitisation vehicles so that investors understand what is actually in there,” says Vrontamitis.
Demand for great transparency offers an opportunity for the platform providers. They provide investors with visibility around what is being bought and can drill down, providing a dashboard of the underlying flows and the legal entities. Treasury teams should also take time to ensure the strength of their underlying platform providers and their ability to onboard suppliers, says Vrontamitis.
Elsewhere the Greensill fallout could manifest in a regulatory response targeting alternative, non-bank lenders. Greensill’s explosive growth from its 2011 beginnings saw it extend US$143bn of financing to 10m-plus customers and suppliers in 175 countries by 2019. However, a regulatory response to the collapse is only likely if Greensill’s demise poses a systemic risk. Perhaps a stronger regulatory debate will build around accounting rules. US investors are increasingly calling on the Financial Accounting Standards Board for clarity on companies’ supply-chain finance programmes to ensure their true financial health, concludes Vrontamitis.