Victor Portillo, Head of Product, Banco Monex expresses his views about Greensill fall and its impact on Mexican factoring market.
Much of the products that we use in Mexico as factoring is actually supply chain finance, a buyer-centric business model focused on large companies with good financial standing and creditworthiness.
The Greensill scandal has been little publicized in Mexico but I am afraid that at first glance, novice eyes may consider its effect harmful for our industry, due to the important volume of business that we handle with this trade model. Normally around 10% - 20% of the total commercial credit portfolio of the Mexican banks consists of factoring or similar products.
However, on a second thought, I think that the reason of the Greensill debacle have little to do with supply chain finance and much more to do with the liberalities that Greensill’s risk management of the company and businesspeople deployed this business.
The seemingly routine practice of using borrowed money to pay suppliers continues to appear in corporate bankruptcies. The collapses of Abengoa in Spain 5 years ago, of Carillion in the UK in 2018 and of the UAE hospital operator NMC Health last year had to do with an over-reliance on invoice financing. Interestingly, these 3 cases that I have just mentioned refer to service companies whose invoices were financed in advance of the service rendering in one way or another.
The Greensill saga reveals the extent to which supply chain finance has strayed from its roots. Greensill arranged many deals for first-rate customers, such as Vodafone and AstraZeneca. But instead of keeping the loans on its balance sheet, it packed many of them into securitised bonds and sold them to third-party funds, such as Credit Suisse and Swiss asset manager GAM.
The Australian trade finance company pushed the model to its limits. Greensill offered its services to higher risk companies. His clients included NMC Health and British firm BrightHouse, which went bust in 2020. Greensill also used much more exotic structures at times. It included aircraft leases as trade finance operations, finance of potential accounts receivables so called ‘prospective receivables finance’ or took stock warrants as payments that it kept on its own balance sheet.
But what ended up sinking Greensill was the massive concentration on a small number of obligors (some of them related to public companies well known) which consequently brought the withdrawal of commercial credit insurers, causing Credit Suisse to freeze its funds. If we look at it coldly, this has little to do with the nature of supply chain finance and more to do with overly aggressive and ambitious management. In short, Greensill morphed supply chain finance far beyond its original blueprint.
As always, the most valuable thing in a crisis is the lessons learned from someone else's head.
In Mexico, most of the supply chain finance business is done by banks, who keep only quality assets on their own balance sheet. The factoring lines we grant normally may not be as big or sexy as to attract investors in the securities market, but they help us keep possible losses at acceptable levels. When risk distribution is used, it is to enhance returns or create additional capacity. This practice we have learned in our country during the years, and it means syndicating large factoring facilities and share the risk with competitors while differentiating ourselves only by service.
And margins have decreased over the years as well, reflecting a lower risk business, for the benefit of the sellers.
I remember a colleague telling me that being a professional trade financier was ‘boring’. I do not doubt it at all. Supply chain finance is boring, and tremendously safe if it is done right. And it continues to grow year after year. Too bad we are not going as fast as our emerging economy in Mexico demand, so we must keep on working hard to provide much more ‘boring’ factoring to the market.
One of the drivers that led to this crisis was a genuine and, I would like to think, an honest endeavor to be innovative from Greensill. And I would like to stick to this idea to conclude this article: innovation is key for this business, but in my opinion, it must keep the basis of the operation unaltered (finance of real receivables), keep all operation and risks in control. Innovation should come from basic elements like customer service (to introduce and to better serve to new markets, through better technology offerings, by greater regional integrations, etc.) and not simply from the assumption of exaggerated credit and operating risks, which are most of the times, unknown to all of us.