A year after Greensill Capital’s collapse, payouts to investors in funds linked to the supply chain finance company have slowed to a trickle.
The funds held $10 billion in assets, mostly from Credit Suisse’s prized ultra-wealthy clients, and invested in notes provided by Greensill, which in turn lent money to a series of companies. Credit Suisse has so far returned $6.7 billion to investors, with another $600 million held in cash. The bank is now focused on recovering the maximum of the remaining $2.7 billion.
But the process has entered a new phase of attrition, centered on torturous debt renegotiations, lengthy court cases and contested insurance claims.
“We are now at the hard core where it will take time,” said a person involved in the recovery process. “I don’t think there will be a huge amount of money coming in for a while.”
The bank revealed last week that the 1,200 investors trapped in its funds were unlikely to recoup their losses for at least five years, if at all.
“We have seen an absolute change in the mood of investors over the past few days – the reaction to Credit Suisse’s latest disclosure has been furious, especially as it has given the bank the advantage of [the] doubt,” said Natasha Harrison, managing partner of the law firm Pallas, which represents fund investors preparing litigation against Credit Suisse. “No one is going to be willing to wait five years to get their money back – and even then there’s no certainty they’ll get it back.”
Despite client anger, Credit Suisse quickly decided not to make up the shortfall, in part because executives feared it would set a precedent. If the bank offered to guarantee customers’ investment losses, it would lead to a sharp increase in the bank’s regulatory capital requirements.
Over the past year, various proposals have been considered that could allow customers to draw a line under the debacle, according to people involved in the discussions.
In a recent idea, clients would have been offered tradable instruments backed by the proceeds of the takeover. Those who were willing to wait could get more of their investment back, while those who needed short-term cash could sell the instruments at a discount.
However, none of the proposed projects have made it past the design stage, due to their complexity, according to those involved in the plans. The bank therefore only works to recover the funds and reimburse the customers as the cash slowly flows.
“None of these schemes worked, so we are back to hard negotiations with debtors,” said one person involved. The bank offered affected customers free banking services under an initiative known as Project Sunflower, which cost Credit Suisse $30 million in its first months.
The $10 billion in assets held by Credit Suisse made up the lion’s share of the $17.7 billion loaned by Greensill when he took office last year – of which $9.3 billion has yet to be recovered, according to an administrator’s report last week.
Credit Suisse is dividing the $2.7 billion it still has to recover into four installments: $1.3 billion owed by GFG Alliance, the group of companies headed by British steel magnate Sanjeev Gupta; $690 million owed by Bluestone Resources, a mining company owned by West Virginia Governor Jim Justice; $440 million owed by the bankrupt US construction company Katerra; and approximately $300 million owed by a collection of small debtors who have shown an unwillingness or unwillingness to repay.
Much of Credit Suisse’s early dealings focused on dealing with Gupta, the Indian-born industrialist, whose sprawling metallurgical empire employs thousands of workers globally and whose growth has been spurred by more than of $5 billion borrowed from Greensill.
Of the $1.3 billion GFG owes Credit Suisse, $274 million relates to its Australian assets, the most profitable part of the group.
Under a deal Gupta and the Swiss bank reached in October, GFG has repaid a third of the money owed by the Australian firm and agreed to pay the rest on a monthly basis with interest by mid -2023.
But much of the remaining $950 million is due to its troubled UK operations, which Credit Suisse dealmakers have deemed almost worthless. The bank therefore began filing insurance claims to recover the losses.
Insurance was crucial to Greensill’s securitization machine. By compensating against the risk of non-payment by borrowers, it made it possible to present debts to investors as almost risk-free.
Credit Suisse had filed 11 claims for non-payment by the end of February, covering a total of $1.5 billion of its exposure. But Japan’s Tokio Marine Group, Greensill’s credit insurer, said last week it considered the policies covering the lender to be void because they had been “fraudulently obtained”. Credit Suisse called this claim “unsubstantiated”.
The legal status of the disputed insurance is to be tested for the first time in a case in Australian courts, bringing together a handful of claims linked to Greensill, including a couple from Credit Suisse and a $146 million claim from White Oak, an investment firm.
Richard Wulff, executive director of the International Credit Insurance and Surety Association, a trade body, pointed out that this was a “unique case, in many different aspects . . . the risks involved, the way in which the risk was structured, the length of the chain”.
The fate of this crucial insurance cover will rest, in part, on the practices of a small Sydney-based credit underwriting firm, The Bond & Credit Co. Having previously written policies on behalf of its parent company Insurance Australia Group, BCC was acquired by Tokyo Marine in 2019.
The following year, BCC fired one of its executives for exceeding its underwriting authority and notified Greensill’s insurance, which ultimately amounted to $10 billion in coverage.
IAG has estimated its liabilities under Greensill policies, including legal fees, at $485 million, but expects the same for reinsurance recoveries. It previously said any net reinsurance exposure was transferred to Tokio Marine as part of the 2019 deal. The Japanese group said this week it would “vigorously defend” any claims and continues to maintain that it does not will not be materially impacted by Greensill fallout.
The legal documents show that IAG raised a number of concerns about the way the BCC-agreed policies were written and extended – including that IAG and reinsurer Scor “did not approve the wording and structure” one of Greensill’s main insurance policies. The companies all declined to comment.
Bluestone is another debtor with which Credit Suisse negotiations have stalled. At one point, the talks were progressing so little that the bank considered resorting to legal action against the mining group and its millionaire political owner.
But in September, Bluestone offered to pay the bank $300 million and offer half the proceeds from the sale of its mining business to settle the $690 million it owed.
The proposal prompted talks to resume. In a statement to the Financial Times, Bluestone’s lawyer said: “Bluestone has reached an agreement in principle with Credit Suisse regarding the Greensill matter which is in the final stages of documentation.”
However, the bank kept its options open by filing insurance claims on some of Bluestone’s debt.
With Katerra, which filed for bankruptcy with more than $1 billion in debt last June, Credit Suisse took a different approach. The bank has taken legal action against SoftBank, the Japanese conglomerate whose $100 billion Vision Fund has backed Katerra.
The case centers on a 2020 deal in which SoftBank agreed to an emergency cash injection into Greensill, which was intended to cover Katerra’s debts. The FT then revealed that the money never reached Credit Suisse funds.
The Swiss bank is now seeking to establish what SoftBank executives, including chairman and chief executive Masayoshi Son, knew about the deal by submitting documents to appear in courts in California and Arizona.
SoftBank attempted to block the request and the next hearing is scheduled for May 20. Credit Suisse has informed SoftBank that it intends to initiate proceedings in the English High Court later this year.
Although an out-of-court settlement is the most likely end result, the personal animosity between Credit Suisse chief executive Thomas Gottstein and Son means it’s not a foregone conclusion.
SoftBank was once a major Credit Suisse client, but the bank has alleged Son misled Gottstein about the Katerra deal, and the Swiss banker continues to harbor deep resentment over the deal. , according to people close to him.
The remaining $300 million of Greensill funds yet to be recovered are made up of debt from an eclectic group of small businesses. Credit Suisse has little confidence in collecting much of the outstanding debt and has already started filing insurance claims.
Among the holdouts are companies linked to Andrew Foreman, a Yorkshire businessman who founded the Beverley Polo Club, and a Chester-based company that provides services for people with learning disabilities and is owned by a neighbor of Greensill founder, Lex Greensill.
None of the holdouts or debtors responded to requests for comment, except for Bluestone and GFG, which declined to comment.
Credit Suisse’s debt collection team expects these cases to drag on. “There are a lot of details in there, but the bottom line is that it will be a difficult task,” said a person involved in the recovery.
“We know we’re not going to recover 100% but how much is very difficult to determine.”