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Greensill’s private status sheltered it from short seller scrutiny

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By Owen Sanderson
09 Mar 2021

Short sellers get a lot of stick, whether it is Elon Musk taunting them, an army of Redditors squeezing them or the corporations they target otherwise harassing, suing and investigating them. But they play a vital part in capital markets, as underlined by the Greensill affair — where the finance firm’s private status meant that for too long it could hide from the accountability that short sellers can help deliver.

Greensill’s UK entity filed for administration on Monday, and the business appears to be on the verge of breaking up, with Apollo set to cherry-pick the parts it likes, and Greensill clients rushing back to their relationship banks where possible.

The basic story should be familiar to everyone reading GlobalCapital — but if not, Credit Suisse froze $10bn of funds tied to the supply chain finance firm following a lapse in Greensill’s insurance. That eventually led to Greensill filing for insolvency as the firm’s business unravelled.

At this point, the causes of the collapse act as a sort of a Rorschach test: a blob on to which anyone can project their own pet theories. Perhaps Greensill survived as long as it did because of poor shadow banking rules, inadequate banking supervision, tolerant rating agencies, illiquid fund structures, cosy political ties, presscheerleaders, and so on.

But it is notable that, for such a large company, it has been extremely difficult for investors to express their views on its prospects, particularly if they are negative. It is privately held, with investments from SoftBank and management.

It claimed to be among the world’s most prolific bond issuers, at least in terms of numbers of ISINs per day — but most of these bonds were privately placed, unlisted instruments which go straight into banks or funds and don’t come out again.

One short investor said he had been able to source just €4m of stock to borrow from Lagoon Park Capital, a vast Greensill-sponsored vehicle funding around €7bn in supply chain financing. No structures, offering memorandums, ratings or other deal documents are available publicly. Accredited Greensill funders can log in to a private website for basic deal information, but that’s about it.

Greensill itself, meanwhile, has very little corporate debt, aside from a loan from Credit Suisse, and no banks have written sizeable protection contracts on this. It has a bank in Germany, funded through deposits — but who would be fool enough to try to short something guaranteed by the German government?

The riskiest instruments in the Greensill complex are the subordinated securitization tranches backed by payment obligations of the weakest Greensill clients. But they were all retained by Greensill itself.

John Hempton, founder of Bronte Capital, published a blog on Monday asking who was left holding the bag on Greensill — a very valid question, and one which is surprisingly difficult to answer. Hempton concluded: “It could be Insurance Australia Group or Tokio Marine [Greensill credit insurers]. It could be German taxpayers, through the subsidiary bank, and Credit Suisse.”

But that just underlines how slippery it has been trying to get a grip on Greensill. Credit Suisse and Tokio Marine may have trouble yet to come from their Greensill involvements, but these are big companies with lots of other moving parts, and they may well be able to absorb any damage from the Greensill situation. Even if an investor had been convinced years ago that Greensill was trouble, there were simply very few good ways to express that view and profit from it.

That is bad news for markets, since it closes off a crucial incentive for investors to dig up more information and compel more disclosure from a company. Activists like Carson Block at Muddy Waters successfully cast doubts on Greensill clients, most notably Abu Dhabi healthcare firm NMC Health, which subsequently collapsed, and on the use and abuse of the supply chain finance, which Greensill provided.

But the company itself remained hard to short. The press provided most of the scrutiny, but this is not a substitute for a robust market where the share price can incorporate more information about a company and where correct calls and better information are rewarded.

Of course, one cannot force a private company on to a public stock exchange, or force it to list its instruments purely for the benefit of short sellers. But it is possible for regulators to force firms out of the shadows. There is no reason companies over a certain size should not provide good financial disclosures, whether public or private.

With Greensill, for example, there was no disclosure (apart from a court case the week before its collapse) to suggest it hadfailed to roll a staggering $4.6bn of insurance cover that was crucial to its business.

When investors can take either side of a trade, price action works to discipline companies. Concerns about concentrations and disclosure, which can blow up whole firms if left to fester, can be hauled out in public and scrutinised. Without this mechanism, though, the casualties can be swift and sudden.

If you have read this far, you might be thinking of last year’s best counter-example — the collapse of Wirecard. It’s true that, despite a listing and extensive short selling, Wirecard still folded almost overnight, failing to make even the first 0.5% coupon on a bond it had issued the previous September.

But investors who stuck by the firm and believed its stories only had themselves to blame when they were zeroed. The debate over the firm’s fate was somewhat binary — did it, in fact, have the €2bn it claimed to have? — but at least that conversation could be had in public.

By Owen Sanderson
09 Mar 2021