The Greensill case illustrates the impact of the COVID-related crisis on the shadow banking sector to which riskier credit business had migrated — financed by securitisation rather than deposit taking — following the heavier capital requirements imposed on regulated banks after the 2008 financial crisis. It also shows that Lex Greensill's engagement in crisis-driven government funding programmes goes back to the days of the crisis and his time with Citibank.
In 2020, Lex Greensill had sought financial assistance by lobbying HM Treasury and the Bank of England for inclusion in COVID-related government loan and loan guarantee schemes, initially in the Covid Corporate Finance Facility (CCFF).
Correspondence relating to Greensill Capital's application to the Covid Corporate Financing Facility (CCFF) indicates that Lex Greensill and former UK Prime Minister, David Cameron, had been involved in Bank of England asset purchase schemes in 2009.
Lex Greensill said in a letter to Rishi Sunak, Chancellor of the Exchequer, on March 17, 2020 that at the time of the banking crisis he, Cameron, Jeremy Heywood, the late Cabinet Secretary, and the Bank of England had "led a pioneering initiative to channel funding into SMEs".
It was an asset purchase facility at the Bank of England which had provided much-needed stability in the economy by ensuring that capital flowed through supply chains to help small businesses trade through that tough economic period, he said.
"The supply chain finance market was able to deliver material amounts of capital across the full spectrum of supply chains," he said.
Lex Greensill went on to recommend that the 2009 asset purchase facility be re-activated and that supply chain and accounts receivable assets — all of them fully-insured to AA-level — should be treated as eligible collateral under the Sterling Monetary Framework. He also said he believed that such a facility — in an amount of £10-20 billion — would give confidence in the capital market investors who underpinned the market. He claimed that, in the previous year, his company had created more than £100 billion of supply chain finance assets that had been purchased by institutional investors, funding more than £2.6 million suppliers, most of them SMEs.
What was needed, he said, was a signal of confidence to the capital markets that that asset class, which was short-dated, self-liquidating and fully insured, also offered liquidity, if needed. That, he said, was why they needed the support of the Bank of England through a new asset purchase facility. As discussed further here, the Asset Purchase Facility was extended to include secured commercial paper in July 2009. It was described in the press release as being willing to offer to buy securities backed by assets such as trade receivables, consistent with the APF's aim to purchase high-quality assets of broadly investment grade. Subsequently the secured commercial paper facility was extended to specifically cover supply chain finance based commercial paper in 2010.
Secured commercial paper facility in 2009 was very limited
Bank of England archived documents reveal that there had been one eligible issuer, a Delaware-registered special purpose vehicle called Cedar Springs Capital Company Ltd LLC. Cedar Springs was described by Fitch ratings as a fully supported, multiseller asset-backed commercial paper program established in August 2002. Fitch also said it was structured as a bankruptcy-remote, special-purpose Delaware limited liability company and its primary purpose was to purchase assets and make loans secured by interests in various financial assets and other eligible securities by issuing commercial paper with maturities of up to 397 days.
Despite Greensill's characterisation of his asset class as "fully insured", however, credit insurance has proved to be a major problem for Greensill. As reported on March 5, 2021, Credit Suisse had started to wind down $10 billion of Greensill-linked funds. The Greensill group was preparing to file for insolvency and was in talks to sell parts of its business to U.S. private equity firm, Apollo Global Management Inc. One of the reasons for the wind down of the Credit Suisse funds related to credit enhancement provisions for the notes; Japan's Tokio Marine, the company insuring the debt, had declined to renew its coverage with Greensill in March 2021. GAM Investments also announced in March 2021 that it had closed the GAM Greensill Supply Chain Finance fund (GAM GSCFF) to subscriptions and redemptions as a result of recent market developments.
In 2019 Scope Ratings stated that the fund had comprised notes issued by three pass-through bankruptcy-remote SPVs. It said further that the notes were backed by irrevocable payment undertakings payable by obligors and created by way of the relevant obligor's approval of trade receivables, in the course of supply chain finance. They were referred to as "supply chain-financing receivables". Among the terms were that the obligors were required to be of investment grade quality and the credit risk of an obligor's non-payment was required to be insured by an insurer with a credit quality commensurate with at least an A rating.
It also said Greensill Capital (UK) Ltd originated and managed the supply chain finance programmes under which the obligations from the obligors were created. GAM International Management Ltd (GAM) was stated to be the portfolio manager of GAM GSCFF and Marsh Ltd arranged the insurance coverage in relation to the obligors. Citibank N.A. London Branch was the SPVs' account bank and State Street Bank Luxembourg S.C.A. provided the depositary services for the fund, which included holding investable cash.
Due diligence and the CCFF
When asked about due diligence by the Commons Public Accounts Committee Charles Roxburgh, second permanent secretary to HM Treasury, said the Treasury had determined that Greensill's proposals were not eligible to be included in the CCFF. Although Greensill had asked the Treasury to change the criteria so that it could meet them, the Treasury had decided the public interest would best be served by rejecting Greensill's proposals. Full due diligence would not be carried out on an applicant who had been refused, he said.
On March 19, 2020 Lex Greensill had written to Tom Scholar, permanent secretary to the Treasury, stating that three minor amendments (which were redacted) were needed to the CCFF that would allow the Bank of England to accept supply chain finance and thus deliver the necessary support. On March 24, 2020, in an email to Roxburgh, accompanying his application for inclusion in the CCFF, Lex Greensill said that his firm was daily paying frontline NHS staff at seven of the largest trusts for free. He said, however, that current conditions were making it nearly impossible to continue to deliver that kind of credit at scale without the express support of the CCFF and HM Treasury. He went on to remind Roxburgh that "we've done this before with the Bank of England during the financial crisis".
On March 21, in a subsequent email to Roxburgh — cc'd to Bill Crothers of Greensill, who had been the government's chief commercial officer from April 2012 until November 2015 before moving to Greensill (with some overlapping of roles) — Lex Greensill noted that while the underlying credit of supply chain finance complied with the CCFF, they would need "three tweaks" to be compliant (also redacted ) as they "were back in 2009 when I led Citibank's SCF business and the BoE made the asset class eligible". He added a reference to the fact that Greensill paid pharmacists early in England on behalf of the Department of Health and that the scheme had just been expanded, which would see Greensill increase its early payments on pharmacies. That, he said, would mean they would "permanently inject an additional £1.5 billion into the UK economy".
Eligibility criteria would need to be designed specifically for Greensill
Some elucidation as to the content of Lex Greensill's redacted "tweaks" may be found in the letter dated March 30, 2020 from Roxburgh. He said that there had been a limited precedent when, in 2009, the Bank of England had established a secure commercial paper facility as an adjunct to the Asset Purchase Facility. Roxburgh noted, however, that Greensill's application would require the establishment of a new segment to the CCFF and that the eligibility criteria for the segment would need to be designed to cater for various specific features of the Greensill application.
The "specific features" included the use of insurance to offset obligor default risk; the denomination of many of the assets in foreign currencies, and in the arrangements surrounding the note issuance vehicle in Luxembourg. Roxburgh said he understood that they were looking for £4.3 billion of assets to be included, potentially rising to £10 billion. As discussed further here, he said the chancellor's view was that broadening the scheme in such a significant way would a be very significant and complex extension of the scheme to cater for one particular financing model at a time when many other businesses, including non-bank lenders, were requesting support.
In an email record of a call with Lex Greensill sent by a redacted sender to Roxburgh on March 30, 2020, it was reported that Lex Greensill had sought to clarify a couple of points where he had thought Roxburgh's letter had been inaccurate. It was further recorded that he had asserted the Bank of England had accepted the type of notes under consideration in the 2010 scheme, and that they had involved a credit wrapper in that earlier scheme. The note of the call also indicated that Greensill had proposed a solution to the currency problem (described as a "reference to the BoE swap lines").
He was reported as having claimed that all the companies in the asset bundle, bar one, would be eligible to access the facility in their own right without needing a credit wrapper to secure eligibility, and that the 2010 structure had been used by two other providers (whose identities were redacted). Lex Greensill had also pointed out that the only beneficiaries were SMEs.
Eligibility and the 2009 SCPF
The market notice for the 2009 SCPF with regard to the eligibility criteria for the underlying assets indicated that, consistent with setting appropriate constraints on risk exposures incurred by the fund, the Bank of England would look in detail at the underlying assets of each programme. It would pay particular attention to the maturity of the underlying asset pools, the complexity of transaction structures, the credit risk of each transaction and its contribution to activity in the United Kingdom economy. Furthermore, while not an exhaustive list, it said the following types of assets were stated to be likely to be deemed acceptable: direct short-term credit to companies, such as trade receivables and equipment leases complying with maturity restrictions and short-term credit to consumers, such as for credit cards and short-term loans.
The ratings of the underlying assets in the programme were required to be consistent with the A1/P1/F1 programme rating. Sponsors would be required to provide information sufficient for the Bank of England to assess the underlying quality of each asset pool, such as the models used to determine levels of credit enhancement.
The Bank of England has published a statement in relation to communications between Cameron and Bank of England officials. It said that, on May 1, 2020, HM Treasury, after consulting with the Bank, issued a call for evidence and consulted a number of supply chain finance firms including Greensill on broadening the scope of CCFF to enable access for providers of supply chain finance. It also said Greensill had a number of meetings with HM Treasury and the Bank, and submitted further documentation in respect of those proposals, but no changes were made to the CCFF scheme as a consequence of this exercise.