Two weeks ago I did not know the existence of Greensill, I bet 99% of the readers of this blog do not neither. Their website was taken down last Wednesday, so not more luck if you wanted to have a peek now. I got curious after reading headline after headline on Bloomberg; I got really curious when I read they were a giant in the trade finance business. As you might know, I am still ‘dealing’ with the Atlantis Financiers/Viventor debacle and the associated disbelief on how such activity can bankrupt a company. I have dealt quite a lot in the field in my other career (the one that brings food on the table): it is a low margin, boring business that was dominated by banks until regulation made it even less profitable for them. That’s when new players like Greensill stepped in; it is not a novelty also for the p2p space, Fellow Finance and Investly do that and these are the platform I have experience with, there are more out there for sure.
How does it work?
Let’s say the Obligor is Dell and the supplier is Intel. Dell orders one chip to Intel and by contract it has to pay for that chip after 90 days; Intel has to pay its own suppliers and workforce for the chip it made and does not want to wait 90 days, so Greensill steps in and says to Intel “hey, I can pay for Dell’s invoice today if you give me a 2% discount”. Intel accept and receive its money immediately, while Greensill waits the 90 days and get paid in full by Dell.
A funny bit about my experience in the sector is that once a big financial services company wanted to sell us this solution at the rate I used in my example. The sales person told me that a 2% financing was competitive when equated to my company cost of funding. I replied that she was comparing our annualised cost of funding to a rate that was NOT annualised…and she blanked; in fact if I pay a 2% flat fee to delay a payment by 90 days, the annualised cost is close to four times that. I never understood if she was employing a sale strategy or she had really that poor financial knowledge but I had to send her an Excel file to prove my point…
This simple model in reality is a bit more complicated. Greensill builds a platform for these exchanges to go smoothly, then it contacts a fund manager (they were using GAM and Credit Suisse) who put together Greensill originated debts and offer them in a fund structure to financial investors like insurance companies or pension funds. Greensill is Atlantis Financiers and Credit Suisse is Viventor, to express it in p2p terms.
Unfortunately the Bloomberg articles were more about the scandal of a 7 billions company, managed by a guy that was knighted by Price Charles and had many political connections, that went bankrupt in a matter of days than the reason of the bankrupt. This post by Ben Hunt was way more informative.
Discussing with a friend who has a similar job to mine, he told me that he got approached in 2017 to invest in the GAM fund and managed to retrieve their original sale presentation. There are a lot of interesting elements in it. The fund target was really low, 1 month LIBOR + 5/10 bps, bit more than a traditional Money Market Fund. Here you can see the USD shares fund NAV:
He passed on the investment mainly because he thought that the risk of investing in a non-traditional vehicle (and the hassle to have to explain it to the company Senior Management) was not worth the small return. This reminded me of a line in Morgan Housel ‘The Psychology of Money’ book: Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival. GAM main sale point was that this investment opportunity was really low risk but offered a return higher than comparable options (mainly MMF); the issue is that the higher return was not high enough to compensate for the additional risk: here you reduce your margin of safety in the illusion of being conservative. It is the same concept I included in so many past blog posts: do not invest in any p2p platform that offers a less than 10% return: while 10% is arbitrary (but easy to remember), the point is that you need returns high enough to compensate for the fact that you invest in something novel, not regulated and prone to scams. In the last few months, both Fellow Finance and Mintos said they wanted to create a low risk/low return product because of investors demands. What investors really say is: low risk investments out there suck, please give me more. Instead of accepting the reality, if you want low risk you get 0% return (if you are lucky), investors wants to believe in the illusion that there is more for them out there…and entrepreneurs are ready to cater to those expectations, even if they will be broken eventually. You feel so smart getting 6.75%* from Bondora G&G while you bank is giving you an emoticon for cash left on your current account but as Obi Wan said:
The sale pitch technique used by GAM is not even that novel; back in 2007 some ‘smart’ asset managers, and even traditional banks like BNP, were trying to sell Asset-Backed Commercial Paper portfolios rated AAA that were paying some basis points over traditional MMFs. As you might know, it did not ended well. This is also a good segue to next point.
The GAM-Greensill fund was rated A by Moody’s. If you are asking yourself if after the Great Financial Crisis debacle there is still someone using Credit Rating Agencies opinion to direct their investment decisions the reply is obviously yes; not only investment managers did not find any better solution, Government Agencies that write policies for investment managers force them to use S&P and the gang. They are better than cockroaches after a nuclear disaster, they survive anything (guess who is the biggest shareholder in Moody’s? uncle Warren).
Now, explaining the Greensill saga is further complicated because there were actually two iterations of the fund that got torpedoed for different reasons. The first – GAM one might have been actually legit from a risk point of view. Their presentation states “The Partnership may never invest more than 50% of its net assets in Notes relating to a single Obligor or its group”, “The Obligor must be rated BBB- / Baa3 or better (Investment Grade)”: the fund exposure details were in fact fitting their risk policy and therefore Moody’s rating might have been correct. The first scandal involved the largest investor at the time, Vodafone, at it was more a PR issue than a financial one. In short, Vodafone was giving bad payment terms to its own suppliers and at the same time was investing its cash into the fund to take advantage of its suppliers need of cash. This at least demonstrate that Greensill and similar supply-financing strategy should work and indeed be low risk if the portfolio is diversified enough (The GAM fund was supposed to invest in Notes issued by others, not only Greensill. The fund manager got fired because its ‘ties’ with Greensill). The only way an Obligor cannot pay is if it defaults but since this invoice financing should be a small part of the Obligor overall business, they have all the incentive to settled what is due (maybe a bit later, when the risk of being put into default gets real). This is why at first I quite dismissed Atlantic Financiers problems: I thought they deal with small business (otherwise you cannot explain the 10% yield), the worst affected by COVID, and therefore needed more time to adapt to the new world we live in.
The second and most recent scandal was triggered by Tokyo Marine Holdings, an insurance company that was covering the invoices underlying the Notes; in p2p terms, this is a REAL buyback guarantee: if the borrower do not pay, TMH will cover the payment and then deal with the recovery process. This was a key element of the deal, giving investors comfort and also the reason why returns were so low, since this type of insurance is relatively not cheap compared to the margins of the overall transaction. The issue here was that this insurance was not linked to the maturity of each loan but was an overall wrapper on the portfolio with its own maturity. When the insurance lapsed, TMH decide not to renew it, probably because they realised the underlying portfolio had an exposure too big to a single borrower (GLG Alliance); this triggered panic in the Credit Suisse funds investors and led to the card castle to fall down.
I found this story useful in my investment journey. When I started using p2p platforms, I thought scams were the main risk but would emerge quite fast; unfortunately some risks can still stay hidden under the surface for many years. If I did not start to invest in Bondora via Portfolio Manager I would have probably not noticed their abysmal credit model. Viventor might have been a fake-legit platform even in those years when returns were good or the recent change of owner might have triggered the downturn; we will probably never know. My strategy to diversificate in multiple platforms, maintaining a low exposure to each of them, is driven by my conviction that is really hard to understand which platforms are good (well, spotting some scams is quite easy TBH, my posts on Kuetzal, Envestio & Co are there as a testimony). I took the Solomonic decision to invest only 50% of the returns to enjoy compounding, so that the other half is stashed somewhere else and if anything happens I do not lose everything. So I can feel a stupid when I see others compounding their gains to the moon AND also when a platform I invested in disappear 😉
This story shows you that a lot of people makes mistakes. Investors in the GAM and Credit Suisse funds are professionals paid to research for investment opportunities…and they still fall for scams (lets not even mention Rating Agencies). Bond investors use to say “AAA bonds can only go in one direction: down”. It means you cannot avoid risks, AAA securities are considered risk-free today but everything can change tomorrow, so it makes sense to consider how much are you paid to hold risk instead of running from risks all together.
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