Photographer: Markus Hibbeler / Bloomberg
Photographer: Markus Hibbeler / Bloomberg
Long before Credit Suisse Group AG was forced to liquidate a $ 10 billion fund group it managed with financier Lex Greensill, there were a lot of red flags.
Bank executives soon learned that a large portion of the fund’s assets were tied to Sanjeev Gupta, a Greensill client whose loans were at the center of a 2018 scandal against rival asset manager. GAM Holding AG. They were also aware that a large portion of the insurance coverage on which the funds depended depended on a single insurer, according to a report. Credit Suisse even conducted an investigation last year of its funds that detected possible conflicts of interest, but could not prevent its collapse months later.
On Friday, the bank finally removed the cap and said it would liquidate the strategy, a supply chain financing fund group for which Greensill had provided the assets and which had remained a success story. The funds, which have about $ 3.7 billion in cash and cash equivalents, will begin to return most of next week, leaving about two-thirds of investors ’money tied to securities with an uncertain value.
The decision ended a dramatic week that began when Credit Suisse froze funds after a major insurer of its securities refused to provide coverage for new banknotes. The movement caused shock waves all over the world, provoked Greensill Capital sought a buyer for its operations, and forced a rival GAM Holding AG will open a similar strategy. For Credit Suisse and its new CEO Thomas Gottstein, it is arguably the most damaging reputational success after an already difficult first year in office.
While the bank’s financial toll may be limited, fund investors are left with about $ 7 billion locked into a product that was touted as a relatively safe but higher-yielding alternative to money markets.
Greensill-linked funds were one of the fastest-growing strategies of Credit Suisse’s asset management unit, which attracted money from performance-hungry investors in a region it had had to struggle with for years. negative interest rates. The bank started the first of the funds in 2017, but they really started in 2019, the year in which rival asset manager GAM ended up liquidating a group of bond funds that had invested a large part of their money in titles linked to Greensill and one of his first clients, those of Gupta GFG Alliance.
Credit Suisse funds were also heavily exposed to Gupta at first. As the bank intensified its strategy, the supply chain’s flagship funding fund held approximately one-third of its $ 1.1 billion in asset-linked notes to GFG Alliance-linked companies or their customers as of April of 2018, according to a file.
Credit Suisse executives were aware, but denied at the time that it was an excessive risk, according to people familiar with the matter. They argued that most of the loans were for Gupta customers and not directly to GFG companies, people said, asking that they not be identified because the information is private.
Over time, the proportion of loans linked to GFG and customers appeared to decrease, while new counterparties appeared in fund disclosures that packaged loans to various borrowers, making it more difficult to determine who the counterparty is. definitive. Many of the vehicles were named roads and landmarks in Lex Greensill’s hometown of Australia.
Fund executives also knew that much of the insurance coverage they relied on to make the funds look safe depended on only one insurer, according to the Wall Street Journal. They considered the need for funds to insure the coverage of a wider group of insurers, with no company providing more than 20 percent of the coverage, but never put the policy in place, the newspaper said.
A Credit Suisse spokesman declined to comment.
Greensill, meanwhile, was looking for new ways to fuel the growth of its commercial finance empires after the collapse of GAM funds withdrew one of its major buyers from its assets. In 2019, SoftBank Group Corp. intervened, injecting nearly $ 1.5 billion through its Vision Fund to become Greensill’s largest sponsor. He also made a large investment in Credit Suisse supply chain financing funds, contributing hundreds of millions of dollars, although the exact timing is unclear.
Throughout 2019, the flagship fund doubled in size, but questions soon arose about the intricate relationship between Greensill and SoftBank that fueled growth. The funds had an unusual structure, as they used a storage arrangement to buy Greensill Capital’s assets, without any Credit Suisse fund manager doing the due diligence. Within the broad framework set by the funds, the seller of the assets (Greensill) basically decided what the funds would buy.
Credit Suisse initiated an internal investigation that found, among other things, that the funds had extended large amounts of funding to other companies backed by SoftBank’s Vision Fund, creating the impression that SoftBank was using them and influencing Greensill to prop up their other investments. . SoftBank withdrew its investment in funds (about $ 700 million) and Credit Suisse revised the fund’s guidelines to limit exposure to a single borrower.
Greensill Exhibition
Credit Suisse’s frozen funds linked to Greensill include SoftBank links
Source: Credit Suisse fund reports, positions as of January 21st
Neither Gottstein nor Eric Varvel, head of the asset management unit, nor Lara Warner, head of risk and compliance, seemed to see the need for deeper changes. The bank reiterated that it relied on the control structure of the asset management unit.
Credit Suisse’s review did not mention at the time that Greensill had also extended funding to another of its sponsors, General Atlantic. The privately held company had invested $ 250 million in Greensill Capital in 2018. The following year, Greensill made a $ 350 million loan to General Atlantic, using money from Credit Suisse funds, according to the Wall Street Journal . A person familiar with the matter is currently refinancing the loan.
A spokeswoman for General Atlantic declined to comment.
Shortly after the end of the Credit Suisse test, more red flags appeared. In Germany, regulator BaFin was studying a small Bremen-based lender that Greensill had bought and backed with money from the SoftBank injection. Greensill used the bank effectively to store the assets it acquired, but BaFin was concerned that too many of those assets were related to Gupta’s GFG, a risk that Credit Suisse managers, for their part, had eliminated before. .
Meanwhile, SoftBank was beginning to recoup its investment into an impressive investment from a bet it had made just a year earlier. By the end of last year, participation had been substantially reduced and it is considering lowering the valuation to zero, people familiar with the matter said earlier this month.
However, Credit Suisse highlighted the success of the funds for investors. Varvel, the head of asset management, included them in a December 15 presentation as an example of the “innovative” and “higher margin” fixed income offers that the bank planned to focus on.
Balance jump
Greensill Bank has grown as its parent company pursues supply chains to finance them
Source: annual accounts of Greensill Bank, German regulator BaFin
At the time, Greensill already knew that a little-known Australian insurer called Bond and Credit Company had decided not to renew policies that would cover $ 4.6 billion in corporate loans his company had obtained. The policies were due to expire on March 1, prompting a last-ditch effort by the supply chain firm to take the insurer to court in Australia. That day, a Sydney judge overturned Greensill’s ban and triggered a series of events that have since reverberated around the world.
According to someone familiar with the matter, Credit Suisse did not know until very recently that the insurance was about to expire.
In an update to investors on Tuesday, Credit Suisse said several factors led “cumulatively” to the decision to freeze funds and that it was looking for ways to return holdings in cash. But in a twist that could complicate the liquidation of the rest, he also said Greensill’s German bank was one of the insured and played a role in the claims process, and that BaFin had just closed that bank.
Many of the fund’s assets have protection to make them more attractive to investors looking for an alternative to money market funds. However, the second of them, the High Income Fund, does not use insurance. It is also the fund with the least liquidity, with less than 20% of net cash assets.
Credit Suisse has said it was unaware of any evidence suggesting financial irregularities in the papers issued by Greensill or the underlying companies. The bank has not yet commented on how many of the fund’s assets are linked to Gupta’s GFG Alliance.
– With the assistance of Melissa Karsh