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We Must Learn Lessons of Greensill Debacle: Call for Firms to Become More Transparent in Major Shakeup of Supply Chain Financing

By Steve Murphy
March 30, 2021
in Analysts Coverage, Commercial Finance, Commercial Payments, Debt, Supply Chain
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Challenger Banks

This piece is posted in This is Money and discusses several recent apparent financial collapses while associating these with supply chain finance.  First of all, the author describes reverse factoring as supply chain finance (SCF), but the category of SCF contains various financing types, of which reverse factoring is only one, albeit the most frequently used.  

Members can review one or more of our papers on the subject. The piece goes on to discuss the recent collapse of Greensill Capital, the 2011 startup out of London with backers that include Softbank, and that specialized in this form of SCF. So the gist of the piece is that a more transparent accounting of reverse factoring (or, more broadly perhaps, all types of SCF) is needed.

‘Now the Greensill scandal has prompted calls for a change to accounting rules to force firms to be more transparent about their borrowings. Critics warn many companies could be using supply chain finance to disguise ‘hidden debt’ on their balance sheets….Greensill was one of the biggest champions of this way of lending. In the past decade alone, the London-based firm extended more than £108billion ($150billion) worth of financing to some 8m customers and suppliers in more than 175 countries – with the full reach of its activities still not completely understood….But Greensill – founded by Lex Greensill – collapsed when backers abandoned it over concerns about the value of its assets, triggering a crisis that has put thousands of jobs at risk as the firm’s borrowers have been left in the lurch.’

Quite provocative language but there is no detail to explain, therefore readers will need to delve into this and other cases mentioned in the piece on your own.  We did take a quick look at the Greensill example and it seems that the receivables upon which they built their asset base (SCF is a short term loan, 60-90 days, or the length of typical trade terms) were being re-packaged and sold as separate investments, sort of like securitizing assets like mortgage loans, except that these were identified as short term payables instead of debt on the balance sheet.

Therefore investors would not have clear visibility into the risks involved.  One of the insurance companies backing up the investments decided not to renew a policy or two, and this dried up the firm’s liquidity.  We would need to spend a lot more time reviewing this.  The point of the article is that accounting rules should be revised to require more transparency around how companies are using SCF.

‘Although primarily used for short-term payments, Greensill turned the loans into complicated products that were not what they seemed at first. …Supply chain finance was singled out by MPs and ratings agencies in 2018 as one reason that outsourcer Carillion’s impending collapse was not spotted sooner….Professor Alex Yang, associate professor at the London Business School, has called for accounting rules to be urgently reformed to take into account borrowing via supply chain financing. …This is because, like Carillion and others, many firms class cash owed through these schemes as short-term ‘trade payables’ – and not long-term debt. …But there is no requirement to disclose supply chain financing arrangements specifically to investors….Yang said: ‘Businesses should explain supply chain finance arrangements.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

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Tags: Consumer FinancingDebtGreensillInvestmentsPaymentsSupply ChainSupply Chain Finance

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