(Bloomberg) — Two months ago, Credit Suisse Group AG overhauled a group of funds it runs with Lex Greensill’s eponymous firm to end an unusual arrangement with a large investor that had sparked concerns about conflicts of interest.
Turns out, that wasn’t the only relationship in the multibillion-dollar strategy that may have been somewhat out of the ordinary.
One of the funds had also extended more than $15 million in loans to a small company run by Greensill’s neighbor in Cheshire, England, according to a review of its most recent report, dated April. The company, Special Needs Group, provides services for people with learning disabilities and is run by Barnabas Borbely, whose property is next to the home of the Greensill founder.
The unconventional loans stand out for several reasons: In addition to the fact that Borbely is 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 learning disabilities — is only just getting off the ground. Some of the loans appear tied to real estate rather than typical supply chain assets. Greensill says that it uses real estate as extra security for loans that it makes to some of its customers.
“It’s surprising that a $9 billion group of funds engaged in supply chain finance would be dealing with such small enterprises,” Steve Clapham, founder of London-based research firm Behind the Balance Sheet. “It’s hard to envisage how such a company would repay the debt, nor how it would even have that 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 exited the loans and no longer holds any of them, 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 kicked off an internal probe into the funds after the Financial Times reported on a complicated network of relationships involving Greensill and a key investor, SoftBank Group Corp. The probe concluded in July with Credit Suisse revamping its investment guidelines for the funds, including the High Income Fund. The bank said at the time that no clients had suffered 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 with the more than $1 billion that the High Income Fund oversees, it underscores the pitfalls of a model that effectively relinquishes the responsibilities of traditional fund managers and largely delegates that job to Greensill Capital.
Greensill sources the assets — mostly invoices it buys from suppliers at a small discount — packages them into notes and passes them on to the fund through a warehousing agreement, as long as they meet certain parameters. The structure effectively lets the seller of assets decide what the fund buys.
Greensill said in a statement that Special Needs Group remains a valued client of the firm and passed “rigorous credit and risk assessments.”
“SNG is a great example of a company that can get fairer access to finance thanks to Greensill’s ability to assess and price risk objectively based on current and future cash flows from reliable partners and clients with strong credit ratings, rather than solely on historic performance,” Divya Eapen, Deputy Chief Risk Officer at Greensill, said in an emailed statement.
“Serving small businesses that deserve lower cost finance in this way gets cash into the real economy where it is needed most,” Eapen said. “We fully support the good work 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 says Greensill uses “fintech to identify and factor in future cash flows” when financing companies.
The High Income fund is the riskiest in a group of supply-chain finance products Credit Suisse runs with Greensill, a strategy that has produced steady gains from short-term debt at a time when money market returns are close to zero. The fund gained 5.2% annually since inception in 2018, and 5.5% over the past year, putting it in the top of its peer group, according to data compiled by Bloomberg.
Classified as a liquid alternative fund, the High Income fund can employ leverage to amplify returns and clients can get their money back monthly, with 10 business days notice. Because the assets it holds are rarely traded, the fund produced very little volatility, even as at least three companies it helped finance defaulted in the past year. The fund managed to avoid losses because the assets were either no longer held at the time of default, or Greensill agreed to take the hit.
Investor demand for such steady returns in short-term debt has been strong until recently. In November of last year, the fund was forced to close to new money because it couldn’t find enough new investments. It reopened in March after the onset of the pandemic led to outflows.
The complexity of matching investor demand to supply underscores the challenges for an investment strategy that searches for yield in the often opaque area of invoice-based financings. Because these loans are typically small and mature quickly, finding enough assets from a diverse group of borrowers can be difficult, particularly for a young firm such as Greensill Capital.
Especially in the early years, the firm relied heavily on financing companies tied to British-Indian entrepreneur Sanjeev Gupta. That relationship has since attracted scrutiny from regulators, with German authorities examining a bank Greensill owns in the country over its exposure to Gupta-linked assets, Bloomberg has reported.
Through the Credit Suisse funds, Greensill had also financed a large number of companies in which Masayoshi Son’s SoftBank Vision Fund owns equity stakes. SoftBank is also a large backer of Greensill and it had put hundreds of millions of dollars into the Credit Suisse funds, effectively allowing it to prop up its own investments through the fund.
When Credit Suisse investigate those relationships, it found that 15% of the debt held by the funds was tied to companies in which the Vision Fund also owned equity stakes, and that SoftBank had struck an agreement with three of the funds to ensure that they would only invest in Greensill-sourced assets.
That deal has since been canceled and SoftBank pulled about $700 million from the funds. Credit Suisse said it would change its investment guidelines to reduce the maximum exposure to a single borrower. A spokesman for the bank declined to say whether the Special Needs loans were sold in the wake of that probe as well or whether the fund exited them for different reasons.
While many of the assets in the fund are tied to large companies such as Vodafone Group Plc, Special Needs Group is different. It comprises businesses that provide services for people with disabilities and own properties in Chester, near Greensill’s and Borbely’s homes in north-west England. It also owns a nascent school for children with learning disabilities, which is due to commence its first term this fall, according to its website.
The school and the group advertise that they work with an “innovative finance company” and can provide “attractive funding solutions.” Greensill, in a post on its website, said the school will eventually cater to 75 children and should operate at full capacity by the spring of next year.
“In essence, Greensill is able to use fintech to identify and factor in future cash flows from local authorities and central government to their suppliers rather than working with historical data,” it says in the post, dated Sept. 14.
Credit Suisse held around $15.7 million of loans to Special Needs Group in the High Income fund as of the end of April, including loans dated 2021. A Greensill spokesman said the loans had a maturity of 180 days, which was “not atypical.”
While the fund disclosures don’t reveal the nature of the borrowings by Special Needs, Companies House records show the group had short-term debt of 7.2 million pounds as of January 2019, its latest available financial accounts. The only lender on record is Greensill Capital, which provided a loan to the company for an undisclosed amount in 2018, and a separate mortgage secured against the lease of the site of the nascent school in May 2020, the filings show.
In the last two years, Greensill Capital also provided loans backed by real estate assets near Chester to Essential Property (NW) Ltd., a real estate firm owned by Special Needs Group. The company reported 3.1 million pounds of short-term debt in January 2019, according to the filings.
“It is entirely appropriate for Greensill to hold real estate as security for certain asset classes and we do that wherever possible”, a spokesman for Greensill said. “In structuring assets in this way we mitigate risk yet further.”
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