On Thursday morning, BCR held a Webflash entitled ‘Examining the Greensill Fallout’ in which experts in the supply chain finance field discussed their thoughts and opinions on the implications that breaking news regarding Greensill might have on the industry. Michael Bickers, Managing Director of BCR Publishing, chaired the session and welcomed Sean Edwards, Chairman of ITFA; Matt Wreford, CEO of Demica; Peter Mulroy, Sec Gen for FCI; Igor Zaks, CEO of Tenzor Ltd.; and Frederic Gits, Regional Credit Officer for Fitch Ratings. With such a diverse and well-informed panel, many thoughts and ideas of potential repercussions were discussed, with questions welcomed from the audience.
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To kick off the session, Michael Bickers posed the following thoughts to the panellists:
The panellists were all in agreement that the Greensill fallout is more of a short-term issue and should not have big implications on the industry.
‘The industry is strong and growing tremendously’ stated Peter Mulroy, while Igor Zaks said that SCF is not in danger, and “it will survive” as previously incidents (such as the mortgage crisis in 2008) did, not destroying the products. Sean Edwards mentioned that new players are coming into the business, so this should not cause long-term damage.
‘The market is not disrupted from what is going on in the press now. The market works well, however, the financial products are sometimes misused. It is a matter of what is reasonable’, said Matt Wreford.
In terms of accounting treatment, “there should be some changes especially linked to the transparency and disclosure into the notes of the accounting statements”, underlined Matt Wreford.
In order to try to avoid situations like this happening again, “regulatory changes should be beneficial for the industry” said Frederic Gits, but whether the changes will be less attractive to SCF clients is not known yet.
Extension of payment terms was a point debated as this is one of the benefits of SCF for the corporate, if used with caution. However, suppliers are sometimes concerned. “Extension of the payment terms were already used before SCF, so it is not necessarily linked to SCF”, stated Igor Zaks. “Very long payment terms should be assessed as to whether they are sustainable or not as they can destabilise the companies”, added Zaks.
Sean Edwards mentioned that in Europe there are already regulations in place to limit the payments terms, which as a result is stopping the abuses of extensions of payment terms.
“Credit insurance is an uncommitted risk and this can be pulled out at any time. The structure of Grennsill raised a lot of questions as it seems there was a significant lack of control” said Peter Mulroy.
“Credit insurance is an important source of mitigation. In the Greensill case, there are many questions about the insurance contract in place and what was insured” stated Igor Zaks.
Welcoming questions and comments from the audience, one delegate stated ‘the issue here is one of governance and exposure management, as well as due diligence by investors’. Regarding the part that insurance plays in this incident, Matt Wreford responded ‘credit insurance is quite important in this issue, because what it has been used for fundamentally is enabling investors – who haven’t done due diligence on the underlying credit risks – to rely upon credit insurance; something which is normally a risk-mitigant to investors and funders. In the case of the Credit Swiss fund, it became the primary attraction for investing - i.e. it’s better insured, it’s singularly rated etc. Therefore, the dependence on credit insurance became extremely high. This is a very unusual situation, as banks do manage its risks and primarily underwrites.’
A question was posed regarding whether credit insurance has encouraged people to invest where they may not have done – following on, Matt Wreford commented ‘maybe – but I think credit insurance has become more cautious on single-debtor exposures, and that isn’t due to Greensill, but more due to the pandemic, wherein there is a general reduction in credit insurance availability. This could potentially reduce the amount of liquidity in the market, but only marginally.’
The structure of Greensill’s business was unusual - overreliance on one method of financing, overexposure on one client, dependence on the credit insurance, lack of control - all point out to a specific case, as opposed to standard SCF business. “SCF is a financial solution but not a solution for all problems, however multiple controls should be in place”, said Igor Zaks.
Although the Greensill fallout has rocked the financial world, it appears to be an isolated incident and should not affect the fundamental business of SCF; there has been no suggestion from the regulators that there is systemic risk in supply chain finance. In terms of public perception and understanding of the sector, there are media outlets and forums where the public can gain a better understanding of how Greensill is an isolated case.
For more information and an in-depth look at topics touched on here, you can now download and watch BCR’s ‘Examining the Greensill Fallout’ full Webflash here.