Greensill Turned Supplier Payments Into Securities and Then Failed
A supply chain finance firm collapsed in 2021, taking a bank and a large fund business with it. The product was legitimate and the concentration around it was not.
What Supply Chain Finance Is
A large buyer typically pays suppliers on extended terms, often ninety days or more. Suppliers would prefer payment sooner.
Supply chain finance bridges that gap. A financier pays the supplier early at a small discount, and the buyer pays the financier in full on the original due date. The supplier gets cash, the buyer keeps its payment terms, and the financier earns the discount.
The product is genuinely useful and widely used. The credit risk is on the buyer, who is usually large and creditworthy, rather than on the supplier.
The Accounting Question
A significant issue is how the buyer reports the obligation. It has committed to pay a financier rather than a supplier, which is functionally borrowing.
Historically these arrangements were often reported within trade payables rather than as debt. That treatment makes leverage appear lower than it is, and it obscured the extent of reliance on such programmes at several companies that later failed.
An obligation to a financier is borrowing regardless of which line it appears on, and reporting it as a payable understates leverage.
How Greensill Extended It
The firm originated these receivables and packaged them into notes sold to investment funds, including funds distributed by a major bank, so that outside investors ultimately funded the advances.
Two features made this fragile. The first was concentration. A very large share of exposure related to a small number of clients, most prominently a metals group, which meant the portfolio was not the diversified pool of short term buyer obligations investors might reasonably have assumed.
The second concerned the assets themselves. Some receivables reportedly related to prospective future business rather than invoices for goods already delivered. A receivable for a sale that has not occurred is a very different instrument from one backed by a completed transaction.
The Insurance Dependency
The notes were made acceptable to conservative investors substantially through trade credit insurance covering losses if buyers failed to pay.
When the principal insurer declined to renew coverage, the notes could no longer be presented as low risk, funds could not continue purchasing them, and the funding model stopped immediately. The firm entered administration within weeks.
A business whose viability depends on a single insurer renewing a policy has a single point of failure that is not visible in any financial statement.
The Consequences
An associated bank was closed by regulators. Investors in the funds faced losses and lengthy recovery processes. A major bank suspended and wound down the affected fund range and faced significant reputational damage and litigation. Political controversy followed regarding lobbying access.
The Bottom Line
Greensill sold a legitimate product built on concentrated clients, some receivables without underlying sales, and one insurer. Ask what single relationship a business cannot survive losing, because that is the actual risk.