Credit Suisse Supply Chain Fund loaned to Greensill’s neighbor

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(Bloomberg) – Two months ago, Credit Suisse Group AG reshuffled a group of funds it manages with eponymous Lex Greensill to end an unusual deal with a large investor that had raised concerns about conflicts of interest.

Turns out, that wasn’t the only relationship in the multi-billion dollar strategy that may have been somewhat out of the ordinary.

One of the funds had also given more than $ 15 million in loans to a small business run by neighbor Greensill in Cheshire, England, according to a review of its most recent report, dated April. The company, Special Needs Group, provides services to people with intellectual disabilities and is run by Barnabas Borbely, whose ownership adjoins the home of the founder of Greensill.

Unconventional loans stand out for several reasons: Besides Borbely being Greensill’s neighbor, the company is too small to file public financial statements and a key part of the business – a school for children with disabilities. learning – is just taking off. Some of the loans appear to be tied to real estate rather than typical supply chain assets. Greensill says he uses real estate as additional collateral for loans he gives to some of his clients.

“It’s surprising that a $ 9 billion supply chain finance group of funds deals with such small businesses,” said Steve Clapham, founder of London-based research firm Behind the Balance Sheet. “It’s hard to imagine how such a company would pay off debt, or how it would even have this size of purchases.”

A spokesperson for Credit Suisse declined to comment on the loans. The fund, Credit Suisse Nova (Lux) Supply Chain Finance High Income Fund, has since abandoned loans and no longer holds any, according to people familiar with the matter.

Credit Suisse’s family of supply chain funds has already been in the spotlight this year. The Swiss lender has launched an internal investigation into the funds after the Financial Times reported on a complicated web of relationships involving Greensill and a key investor, SoftBank Group Corp. the High Income Fund. The bank said at the time that no clients had suffered any losses and that the overhaul was intended to “further protect the interests of all” investors in the funds.

While the investment in special needs was relatively small compared to the over $ 1 billion the High Income Fund oversees, it highlights the pitfalls of a model that effectively forgoes the responsibilities of traditional fund managers and largely delegates this work at Greensill Capital.

Greensill sources assets – mostly invoices he buys from vendors with a small discount – packages them into notes and passes them to the fund through a warehousing agreement, as long as they meet certain parameters. The structure effectively allows the asset seller to decide what the fund buys.

“Estimated customer”

Greensill said in a statement that Special Needs Group remains a valued customer of the company and has passed “rigorous credit and risk assessments.”

“SNG is a great example of a company that can achieve more equitable access to finance through Greensill’s ability to objectively assess and price risk based on current and future cash flows from trusted partners and customers. with good credit ratings, rather than just historical performance, “Divya Eapen, deputy director of risk at Greensill, said in an emailed statement.

“Serving small businesses that deserve lower cost financing in this way, liquidity is pumped into the real economy where it is needed most,” Eapen said. “We fully support the good work that SNG is doing and look forward to continuing our partnership. “

Special Needs Group referred to a new post on Greensill’s website that describes its business and states that Greensill uses “financial technology to identify and consider future cash flows” when financing businesses.

The High Income Fund is the riskiest of a group of supply chain finance products that Credit Suisse manages with Greensill, a strategy that has generated consistent gains on short-term debt at a time when yields in the money market are close to zero. The fund has gained 5.2% per year since its inception in 2018, and 5.5% in the past year, placing it at the top of its peer group, according to data compiled by Bloomberg.

Liquid alternative

Classified as a liquid hedge fund, the High Income fund can use leverage to amplify returns and clients can get their money back each month, with 10 business days notice. Since the assets it holds are rarely traded, the fund has generated very little volatility, even though at least three companies it has helped finance have defaulted over the past year. The fund managed to avoid losses because the assets were no longer held at the time of default, or Greensill agreed to take the hit.

Investor demand for such stable yields on short-term debt has been strong until recently. In November of last year, the fund was forced to close its doors because it could not find enough new investments. It reopened in March after the start of the pandemic led to exits.

The complexity of matching investor demand with supply underscores the challenges of an investment strategy that seeks return in the often opaque realm of invoice financing. Since these loans are usually small in size and mature quickly, it can be difficult to find enough assets from a diverse group of borrowers, especially for a young company like Greensill Capital.

Especially in the early years, the company relied heavily on finance companies linked to Anglo-Indian entrepreneur Sanjeev Gupta. The relationship has since caught the attention of regulators, with German authorities examining a bank Greensill owns in the country over its exposure to Gupta-related assets, Bloomberg reported.

Through Credit Suisse funds, Greensill had also financed a large number of companies in which Masayoshi Son’s SoftBank Vision Fund has stakes. SoftBank is also a major backer of Greensill and has invested hundreds of millions of dollars in Credit Suisse funds, enabling it to support its own investments through the fund.

When Credit Suisse investigated these relationships, it found that 15% of the debt held by the funds was related to companies in which Vision Fund also had stakes, and that SoftBank had reached an agreement with three of the funds for s ‘Ensure they only invest in assets sourced from Greensill.

That deal has since been canceled and SoftBank withdrew about $ 700 million from the funds. Credit Suisse has said it will change its investment guidelines to reduce the maximum exposure to a single borrower. A spokesperson for the bank declined to say whether the special needs loans were also sold as a result of the investigation or whether the fund left them for various reasons.

“Financing solutions”

While many of the fund’s assets are tied to large companies such as Vodafone Group Plc, Special Needs Group is different. It includes businesses that provide services to people with disabilities and own properties in Chester, near the homes of Greensill and Borbely in the North West of England. It also has a fledgling school for children with learning disabilities, which is expected to begin its first term this fall, according to its website.

The school and the group announce that they are working with an “innovative finance company” and can provide “attractive financing solutions”. Greensill, in a post on his website, said the school will eventually accommodate 75 children and should be operating at full capacity by the spring of next year.

“Essentially, Greensill is able to use financial technology to identify and factor in future cash flows from local authorities and central government to their suppliers rather than working with historical data,” he says in an article dated September 14.

At the end of April, Credit Suisse had approximately $ 15.7 million in loans to Special Needs Group in the High Income fund, including loans dated 2021. A Greensill spokesperson said the loans had a maturity of 180 days, which was “not atypical”.

While the fund’s disclosures do not reveal the nature of Special Needs borrowings, Companies House records show the group had short-term debt of £ 7.2million as of January 2019, its last available financial accounts. The only registered lender is Greensill Capital, which provided a loan to the company for an undisclosed amount in 2018, and a separate mortgage secured by the nascent school site lease in May 2020, according to the documents.

Over the past two years, Greensill Capital has also provided real estate asset-backed loans near Chester to Essential Property (NW) Ltd., a real estate company owned by Special Needs Group. The company declared 3.1 million pounds of short-term debt in January 2019, according to the documents.

“It is entirely appropriate for Greensill to hold real estate as collateral for certain asset classes and we do so to the extent possible,” said a spokesperson for Greensill. “By structuring assets in this way, we further mitigate risk. “

© 2020 Bloomberg LP

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