British taxpayers face steep losses on a government-guaranteed loan Greensill Capital made to a business owned by a neighbor of its disgraced founder.
Greensill collapsed in March last year, triggering a financial and political scandal that engulfed David Cameron, the former prime minister who advised the supply chain finance firm.
The saga spanned Australia, where founder Lex Greensill used to run a watermelon farm; Switzerland, where Credit Suisse investors funded Greensill; and Japan, where SoftBank bought into Greensill at a racy valuation.
The bad loan in the UK was a much more local affair, although it affects some of those global institutions. Chester-based Special Needs Group is owned by local businessman Barnabas Borbely, who lives round the corner from Lex Greensill in the Cheshire village of Saughall.
The company, a private business that provides services for people with learning disabilities, has now also collapsed into administration, with Greensill Capital set to recover less than a quarter of the money it lent to the business.
A report from the company’s administrators shows that Greensill is Special Needs Group’s “only material creditor” and is set to receive just £ 4.9mn of the £ 22.8mn it is owed, describing this as a “significant shortfall against their security”.
Of the debt extended by Greensill, £ 5mn is in the form of a government-backed loan, while the larger portion was funded by a Credit Suisse investment fund.
Greensill has filed an insurance claim in a bid to recover the losses, according to a person familiar with the matter, but it could face an uphill battle reclaiming the money. Tokyo Marine and Insurance Australia Group, which insured the bulk of Greensill’s riskier lending, have both accused Greensill of making “fraudulent” misrepresentations and declined to pay out on any claims.
The British Business Bank confirmed that government guarantees remain in place on Greensill’s loans to small businesses such as Special Needs Group but the state-owned lender told the Financial Times that it had now opened a fresh investigation into Greensill’s “compliance with the CBILS”. [Coronavirus Business Interruption Loan Scheme] requirements ”.
“We note that if a lender is found to have failed to properly apply scheme eligibility criteria or breached scheme rules, the bank has measures available to it to remedy the situation, including the removal of the guarantee,” the British Business Bank added.
The bank has already suspended government guarantees on £ 400mn of Greensill advanced loans under a separate Covid-19 lending scheme for larger companies.
Greensill Capital declined to comment.
Under an administration deal, a new company that Borbely established this year will buy Special Needs Group’s operating subsidiaries for £ 5.2mn. The administrator’s report notes that “no other offers” were made for these business units and that it received a valuation on a “break-up basis” of just £ 4.3mn.
While Borbely provided an “unlimited personal guarantee” on Special Needs Group’s £ 23mn loan from Greensill, the finance firm is releasing him from this obligation under the terms of the administration deal.
Aside from the £ 5mn of government-guaranteed debt, Greensill packaged the bulk of the loans to Special Needs Group into Credit Suisse’s now stricken $ 10bn of supply-chain finance funds, which have exposed some of the Swiss bank’s richest clients to potentially billions of dollars in losses.
Greensill’s loan to Special Needs Group is one of a number of more speculative transactions that strayed from the invoice financing in which it was supposed to specialize. Greensill pushed the boundaries by also lending against hypothetical future bills, a risky practice that contributed to the finance group’s downfall.
The administrator’s report shows that Greensill essentially provided start-up financing to Special Needs Group, extending £ 18mn of loans to the business on an “interest only” basis in 2018, when the Chester-based company was only a month old.
Greensill in 2020 announced it had developed a “revolutionary funding model” with Special Needs Group, under which it used “fintech to identify and factor in future cash flows from local authorities and central government”.
However, while Lex Greensill and Borbely lobbied their local council to adopt the finance firm’s “supply chain finance model”, Cheshire West and Chester Council never adopted the proposed scheme – determining it offered “no benefits”.
Borbely did not respond to requests for comment.