Greensill collapse risks future of Liberty Steel
The failure of Greensill Capital may have ramifications far beyond questions of who is owed what, as investigations into Covid-19 loan procurements and tougher regulation of supply chain finance are now in play.
Calls for a full inquiry into the government’s decision-making process for handing out multi-million-pound emergency coronavirus loans are growing following the collapse of finance firm Greensill Capital.
The demise of Greensill earlier this month has put the future of Liberty Steel into doubt, as the supply chain finance company helped prop up Britain’s third-largest steel manufacturer, amongst other companies.
Liberty, owned by Sanjeev Gupta, sought a £170m bailout from the government to safeguard its workforce of 3,000 UK employees, but was rejected amid concerns of the opaque structures used by Greensill and the potential loss of taxpayer money.
Last year, the Financial Times revealed that Greensill had advanced government-backed loans under several companies also owned by Gupta via Greensill’s GFG Alliance group to borrow multiples of a £50m cap on each borrower.
KPMG has since been hired to pick through billions of pounds of government-backed loans to ensure that lenders have complied with the rules, in the wake of Greensill meltdown.
Lenders could have the taxpayer-funded guarantee removed or have to go back over the coronavirus loans they have made since last spring to redo the details if any breaches are uncovered.
GFG, the Gupta family group, oversees a complex network of companies with various interests from steelmaking businesses in South Yorkshire and Australia, to an aluminium smelter in Scotland and a separate energy company. GFG Alliance employs about 35,000 people globally, including a total of 5,000 in the UK. About 1,000 of the Liberty Steel workforce are currently on furlough.
Cash for access
Former Prime Minister David Cameron is also at the centre of the wrangle, and is facing questions over his involvement in previous loans funnelled to Greensill, who hired him as an adviser. Cameron’s lobbying for Greensill risked breaking access rules he created whilst in 10 Downing Street.
Cameron contacted Chancellor Rishi Sunak to support Greensill Capital through the government's Covid Corporate Financing Facility, but was cleared of any breach by the lobbying watchdog.
The Registrar of Consultant Lobbyists said Cameron was an employee of Greensill Capital and therefore not required to declare himself on the register of consultant lobbyists. Cameron stood to gain significantly should Greensill have gone public, having held equity worth up to £60m.
Labour and Sir Alistair Graham, former chairman of the Committee on Standards in Public Life, have demanded a full inquiry into the “scandal”.
“The collapse of Greensill has put jobs in Britain’s steel industry at risk and left the British taxpayer exposed to its losses,” said shadow chancellor of the Duchy of Lancaster Rachel Reeves. “The public want to know who is engaged in lobbying the government and are not interested in whether the lobbying is undertaken by consultants or in-house lobbyists. In short, the decision to restrict registration to consultancies is fundamentally flawed.”
Cameron’s office did not respond to a call or email for comment.
Last week, the business secretary, Kwasi Kwarteng, told parliament the government was “looking at all options to see what we can do” to safeguard the future of Liberty Steel and said the government hoped to preserve it “in its entirety”.
“There clearly should be a full inquiry because it sounds like a genuine scandal in which the public purse was put at risk without proper political authority,” said Sir Alistair.
Ministers are being pushed to explain how Greensill Capital owner Lex Greensill gained access to 11 government departments and agencies to pitch the complex supply chain financing arrangements his business was famed for.
Opaque financial structures
How formerly high-flying Greensill Capital, once valued at more than $7bn, hit the rocks has not yet been fully established, but it is believed insurance underwriters covering Greensill’s loans got cold feet.
The controversy has also prompted scrutiny over the nature of supply chain finance, which relies on transparency to ensure everything runs smoothly. The loss of this may have been the undoing, said supply chain finance expert Neil Keenan, a partner at Forensic Risk Alliance accountants.
“Greensill entered into lending agreements with companies under which suppliers are paid by Greensill, on shorter payment terms,” Keenan told AccountingWEB. “The corporation settles obligations to Greensill rather than its suppliers on extended terms, creating a ‘receivable' or asset that Greensill packaged and sold as short-term bonds to investors.”
Corporations were primarily ‘blue chip’ companies with excellent credit ratings and investments were also backed by trade insurance so appeared very secure, he said.
“The arrangement is heavily reliant on the corporation’s ability to settle obligations to Greensill,” Keenan said. “As confidence eroded in the corporation’s ability to pay, the deck of cards started to collapse.” After several high-profile corporate failures that led to defaults on Greensill facilities and concerns of high concentration level with individual corporations, insurance carriers failed to renew policies, Keened said. “Without insurance, the company could no longer package and sell its short-term bonds – investors walked away,” he said. “A lack of transparency makes identifying early warning signs challenging.”
Credit rating agencies and auditors have called for regulations requiring increased transparency on supply chain financing arrangements, presenting them as debt obligation versus trade payables.
“A requirement that providers of supply chain finance report concentration levels of debt held with individual corporations, and the adequacy, duration and commitments under trade insurance policies would further aid monitoring in this space,” Keenan said.
Ratings agency Fitch said the Greensill saga may lead to tighter regulation and greater transparency requirements for supply chain finance transactions.
“Greensill was involved in developing supply chain financing outside of traditional banking channels and its collapse could trigger a liquidity crisis for companies relying on its funding,” Fitch Ratings said. “This could pressure accounting standard-setters to accelerate their review of supply chain financing disclosure.”
The process can lead to a company’s over-reliance on one funding provider replacing multiple suppliers, as occurred with Liberty Steel, Fitch said. “This concentration could be even higher if the company owes money under other facilities or receives other financial services from that same provider,” it said.