Trade Finance Cover Feature: Lex Greensill – The Future of Working Capital

1st January, 2018

Trade Finance Magazine

“When I started my firm, I thought that we’d just stick with doing supply chain finance,” says Lex Greensill, the founder and CEO of Greensill Capital.

Given how far the company has grown since it started, those words sound modest now.

But when it began, Greensill Capital’s mission was to enable small suppliers to access financing. The firm uses financial technology to improve cash flow for suppliers without shortening payment terms for buyers.

The idea came to Greensill growing up on a sugar farm in Australia, where the finances of his family’s business were sometimes strained by the failure of its large buyers to pay their bills on time. The business survived and is still owned by the family to this day, a successful grower of sugar cane, sweet potatoes and watermelons. But witnessing the struggle caused by those delays left its mark on Greensill, who developed ideas on how companies could better access financing, regardless of their size or location.

An MBA and then a career in finance followed. Greensill led the supply chain finance teams at Morgan Stanley and Citibank before setting up shop as an independent in 2011.

In 2013, the firm bought a German bank, whose balance sheet it uses to invest in its various programmes.

Greensill Capital has closed some major transactions in recent years. The company is now involved in sectors as diverse as construction, telecoms, aircraft and power generation. Several of its recent deals have caught the market’s attention for their innovative structures. Indeed, a partner at an international law firm who recently spoke to Trade Finance said that the firm is “by far the most innovative non-bank in the market.”

But the working capital provider has not lost sight of its roots, insists Greensill, who sees the firm’s latest work as a natural extension of its earliest deals.

“I saw a niche in the market to do supply chain finance for small suppliers because the banks were just doing big suppliers. I saw a niche to do supply chain finance for quality industrials, but for those that were not investment grade. And clearly we’ve done some cool things off the back of that,” he says.

"There is more to working capital than simply trade receivables."

“But what’s been interesting is that there is more to working capital than simply trade receivables.”

Receivables taking off

Growing into new areas has led to some “very innovative and cool transactions,” Greensill says. Many of those have been featured in these pages as they have closed, and a couple have picked up Trade Finance awards as they did so.

One such deal is the creation of the world’s first investment fund to focus solely on supply chain finance assets. Partnering with Swiss asset manager GAM, Greensill’s fund invests in a portfolio of buyer-confirmed trade receivables notes with the underlying risk underwritten by insurance firms. Its total assets are nearing €2 billion at the time of writing.

The fund won an “A” rating from Moody’s in March last year, which was higher than the weighted average credit quality of the trade receivables actually in the fund, due to the rating of the participating insurers.

Another successful deal was Greensill’s creatively structured 25-year power financing last year. The deal is a securitisation of trade flow between some hydro power assets and an aluminium smelter over a 25-year period, together with support from the Scottish government.

Under the deal, SIMEC, an energy firm, has assigned future receivables from a power purchase agreement (PPA) to Greensill. It used the proceeds to purchase hydroelectric power assets in Scotland from Rio Tinto. The payments to Greensill are “irrevocable undertakings,” meaning that they must be made regardless of SIMEC’s performance under the PPA.

In December, Moody’s rated the securitisation vehicle at the same level as it rates the UK government—“AA”. Greensill says he is pleased with the outcome because he sees it as a validation of the firm’s structuring process.

“They [Moody’s] went through our origination, our structure, our technology and the way we deliver those out into the market. And of course the asset benefits from a Scottish government guarantee, but they [Moody’s] considered our capital markets distribution framework that we built as being risk-free, so treated it as sovereign risk, which we think is pretty cool. So we got an AA rating from Moody’s, which is the same rating that they give to the UK government.”

Another particularly good example of the firm’s innovation is a deal that closed last year to finance commercial aircraft deliveries. Greensill teamed up with Marsh, the insurer, on a capital markets-based funding structure for Scandinavian airline Norwegian Air Shuttle (NAS).

Using the structure, the airline financed the purchase of six Boeing 737 MAX 8s which it took delivery of between June and August last year. It’s hard to pinpoint the precise value of the deal because aircraft are usually sold at confidential discounts. But appraisers’ estimates put six new MAX 8s, at north of $300 million—so whatever the exact value of the deal, it is hardly pocket change.

The structure of the product was a first in aviation finance. It combines a bond with nonpayment insurance provided by AFIC—an aircraft finance insurance unit set up in June last year by Marsh in response to US Ex-Im’s absence from the market. In fact, some of AFIC’s key members were themselves Ex-Im veterans—Bob Morin, for example, who was a business development head at the ECA.

By insuring against nonpayment, AFIC achieves the same effect as an Ex-Im guarantee—especially important in recent history given US Ex-Im’s withdrawal from the market, which has meant that Boeing’s deliveries have been unable to receive support from the US ECA. Ex-Im has been unable to back transactions larger than $10 million since 2014, causing a large backlog of aircraft transactions. Although things are now progressing in the Capitol, with five new board member nominations approved by a Senate committee in December, it may not be back in business for some time.

Financing commercial jets might seem a long way from its first transactions with small suppliers. However, there is a continuity to it all. As Greensill explains, both types of products are to do with monetising cash flow. Whether those flows come from payments to small suppliers or monthly lease commitments on a plane costing millions of dollars, they can all be structured in a similar way.

“The structure is the same whether it’s a seven-day trade receivable or a 12-year aeroplane lease cash flow, or indeed a payment 25 years into the future for hydroelectric power, as we’ve also done. It uses a combination of capital plus risk mitigants—largely insurance—to deliver to our investors a product that allows us to unlock working capital for our clients so they can put it to work,” he adds.

The AFIC deal pulled in a range of investors in Europe and the US and was soon replicated for other companies and aircraft. Greensill won’t be drawn on whether future products could be developed to finance new aircraft deliveries from Airbus, whose aircraft have also been unable to receive ECA-backed funding due to a corruption probe.

"In a sense, a plane is just a longer-dated version of receivables we put in our fund."

It’s not a surprise to hear that Greensill has more planned. Asked what will be keeping him busy months and years from now, he explains that the firm is expanding into the financing of new asset classes, some of which have not been done before. One of those asset classes—driverless cars—is still some years away from widespread uptake.

The new developments have to do with data— in particular, the fact that the vast quantity of information being produced by new technologies is itself a commodity.

"In the world of finance there is going to be a bunch of very, very significant changes that take place over the next few years. And finance, frankly, isn't really keeping up."

“In the world of finance there is going to be a bunch of very, very significant changes that take place over the next few years, and finance, frankly, isn’t really keeping up with the things that are changing,” he argues.

“Let’s think about autonomous cars, for example. Autonomous cars are going to be enormous consumers and producers of data. In effect, every one of them is going to consume and produce more data than probably your whole office produced five years ago. And that flow of information is also a financial flow, so there’s a very interesting opportunity around that,” he adds.

“If you think about the financing of cars today, in a certain sense it’s similar to how you might buy a house: you raise capital, you buy a capital-intensive item and then you pay it back over time. I see it moving in a direction that’s more like a mobile phone, where you effectively are paying for it as a utility.

“[It will be] somewhere between a phone and Office 365. Instead of buying a piece of software in a box from Microsoft, like we all did in the ’90s and the early 2000s, now what you do is pay £20 a month and Microsoft delivers you the latest version, you get the whole suite of stuff, and whenever there’s an update you get new features. I think what you’re going to see in the way automotive finance is delivered in the future is that automotive finance is going to become a product where the financing will be based on ‘per use.’ When autonomous cars come in, why would you want to own a car per se?”

He adds, “And no one’s got the balance sheet that’s big enough [to finance all these cars].” Greensill won’t be drawn into naming which corporates, manufacturers or other parties his firm is discussing automotive cars with. But, asked at what stage any potential deals are, he says the firm has already structured a product that will allow for such financing.

The effect of all this, he says, will be to “democratise” access to a new asset class. He believes that the product will help the use of driverless cars to become widespread.

He adds: “Most financiers fear that we are the bogeymen as far as most people are concerned, but actually being part of the democratisation of capital gives me and my team a feeling of purpose, and that we’re making a real contribution and being part of are a social good.”

“What we’ve done is pioneer a product that’s going to allow us to be able to deliver that kind of per-use automotive finance on a synthetic basis, so that in the future of autonomous cars, ubiquitous ownership is possible,” he says.

The value of automotive sales last year in the US alone was close to half a trillion dollars. And globally, that figure is around $2.75 trillion, he notes. The manufacturers’ balance sheets will be unable to support volumes that high—so an innovative financial product is needed, Greensill argues.

“The car makers are going to be warranting the amount of use that a car is going to have—not who’s going to use it, or the creditworthiness of who’s going to use it, but rather they’re going to warrant how much use they’re going to get. And they’re going to be warranting the amount of repair and maintenance that it’s going to need. And the capital markets are going to have to deliver the balance,” he adds.

“[It may look like] a bit of a jump between the stuff we’ve done before, but really it’s all part of the same arc, we’re looking at taking future receivables, where there is some degree of certainty around them, and turning those back into cash today to basically pay for the upfront cost of buying the car.”

Financial regulation will be a further boost to such products, he says, given the way that changes next year will make asset ownership more cumbersome.

“You are going to see that space change rapidly, and it’s going to be accelerated not only by technology but by financial accounting standard changes. IFRS 16 comes in at the start of 2019 and it changes the lease accounting rules,” notes Greensill.

The IFRS changes (issued by the International Financial Reporting Standard last year and coming into effect in 2019) have tried to bring more transparency into lease accounting. They will make it harder for companies to keep their liabilities on off-balance sheet leases. The effect of the IFRS changes, says Greensill, will be to encourage the kind of pay-per-use models he believes will be key to driverless vehicles.

“[IFRS changes are] going to mean that there’s even more pressure for people not to own assets, or even lease assets for long periods of time. It’s going to push people more to pay per use,” he adds.

Greensill sees the trend towards per use ownership models extending far beyond driverless vehicles.

"Distributed ledger is about as cool as email is cool. It's just a tool. People really don't care about how you deliver capital to them. What they care about is you delivering a solution to the problem."

“I see it actually moving beyond cars. I think I can see it happening to an extraordinary number of things—even buildings. That model is going to revolutionise the world,” he adds. “I’ve never been as excited about being in business as I am at the moment. I have to confess, when I walk down the street I see gold everywhere I look.”

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