We Must Learn from the Greensill Debacle: Calling on Businesses to Become More Transparent in the Major Supply Chain Finance Reshuffle
This room is published in This is Money and discusses several recent apparent financial collapses while linking them to supply chain finance. First, the author describes reverse factoring as supply chain financing (SCF), but the category of SCF includes different types of financing, of which reverse factoring is just one, although the most frequently used.
Members can consult one or more of our papers on the subject. The article goes on to discuss the recent collapse of Greensill Capital, the 2011 London start-up with backers including Softbank, which specializes in this form of SCF. So the bottom line is that more transparent accounting of reverse factoring (or, perhaps more broadly, all types of SCF) is needed.
“Now the Greensill scandal has sparked calls for changes in accounting rules to force companies to be more transparent about their borrowing. Critics warn that many companies could use supply chain finance to hide “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 company has provided more than £ 108 billion ($ 150 billion) in financing to some 8 million customers and suppliers in more than 175 countries – with the full reach of its activities still not fully understood … But Greensill – founded by Lex Greensill – collapsed when donors abandoned it over concerns about the value of its assets, triggering a crisis that put people at risk. thousands of jobs while the company’s borrowers were left behind.
Quite provocative language but there is no detail to explain, so readers will have to delve into this and other cases mentioned in the article on your own. We took a quick look at Greensill’s example and it looks like the receivables they’ve built their asset base on (SCF is a short term loan, 60-90 days, or term terms (typical commercial) were repackaged and sold as separate investments, much like securitization assets like mortgages, except these were identified as short-term debt instead of debt on the balance sheet.
Consequently, investors would not have a clear view of the risks involved. One of the insurance companies supporting the investments decided not to renew one or two policies, which drained the company’s liquidity. We would need to spend a lot more time looking at this. The point of the article is that accounting rules should be revised to require more transparency on how companies use SCF.
“Although primarily used for short-term payments, Greensill turned loans into complicated products that weren’t what they initially seemed. … Supply chain finance was chosen by MPs and rating agencies in 2018 as one of the reasons why the impending collapse of subcontractor Carillion was not spotted sooner… The professor Alex Yang, associate professor at London Business School, called for urgent reform of accounting rules to account for borrowing through supply chain finance. … This is because, like Carillion and others, many companies classify the cash owed through these plans as short-term “trade debt” – not long-term debt. … But there is no obligation to disclose supply chain finance arrangements specifically to investors…. Yang said, “Companies should explain the supply chain finance arrangements.
Preview by Steve murphy, Director, Commercial and Corporate Payments Advisory Service at Mercator Advisory Group