Will Greensill pull Gupta under?

The downfall of Greensill

Greensill Capital was only 10 years old when it filed for Administration in 2021. It was a major supplier of Supply Chain Finance (lending that greases the wheels of international trade) until the withdrawal of insurance over its lending book was withdrawn – more on this below.

Needless to say, invoices that are not real can’t really be used as security for lending – you’d assume Gupta knew this basic concept as he also owned a bank, Wyelands Bank. Wyelands has also been wound up, after the UK’s Prudential Regulation Authority (banking regulator) found it had lent too much money to GFG without strategies to manage risk or potential conflicts of interest). By the time Greensill collapsed its exposure to GFG (Gupta Family Group) companies was around $5 billion.

Just a few of the court cases

There is now a remarkably long list of entities wanting to get money and/or a pound of flesh from Greensill, Gupta, and anybody else they can think of. Here a but a few of them:

•  Remember Greensill’s bank? Its administrators are suing Swiss insurer Zurich has been sued by Greensill administrators for $405m because Zurich didn’t pay out on its insurance policies over Greensill’s lending.
• Zurich in return is claiming fraud, by both Lex Greensill and Sanjeev Gupta personally, plus three of Gupta’s businesses.
• Citibank and Credit Suisse have applied for the wind up of Liberty Steel (one of Gupta’s) and it seems likely they together with other creditors of Gupta’s businesses are owed $1b. This has had a recent reprieve but keep watching this space.
• The UK’s Serious Fraud Office is investigating suspected fraud, money laundering and fraudulent trading relating to GFG companies – but tantalisingly refuse to give details yet.

The Australian Connection

Greensill and Gupta both have strong ties to Australia.

Not only was Greensill’s founder, Lex Greensill, a Bundaberg boy, but some of its lending book was insured through IAG. Insurance Australia Group issued cover over invoices funded by Greensill, and it was that insurance that gave investors the comfort to put their money into Greensill. IAG was acquired by Tokio Marine, who announced in 2020 it would not be renewing cover at all in the following year (due to missing source documents for some very large transactions, including at Gupta’s companies). This triggered Greensill’s downfall.

Gupta owns Infrabuild (formerly OneSteel & Smorgon Steel), and it is one of the most profitable parts of GFG. Infrabuild wasn’t involved with Greensill and so it’s relatively “clean”, except that it is propping up other businesses in Gupta’s empire via intercompany purchases (real ones) and asset purchases. It has also recently been attempting to take on more debt to fund those transactions as well as purchase more assets from GFG companies. This really does look like using the untarnished businesses to raise money for the rest, which is not a great long-term move.

Will Greensill actually cause the downfall of Gupta?

Infrabuild’s recent December 2023 half-year results do not bode well:

• EBIT is down 50% (to $144m)
• Half year Net Profit After tax is down 75% (to $40m)
• Provision $21m raised for related party Liberty Czetochowa Spolka Z (Polish GFG company) debt – total is $52m, expect that provision to increase by year end as the Russia/Ukraine war continues

Infrabuild is now paying 14.5% interest on $530m debt refinanced in November 2023. It’s even lent Gupta personally $10m as well as Liberty Steel Holdings USA also $10m in January 2024.

At the same time Infrabuild is still taking a demand hit due to a downturn in the Australian housing market. The result: Operating Cashflow is down by a whopping 77% to $62m.

The result seems pretty straightforward: when you milk the cash cow too much, it stops producing milk.

Gupta may well be past the point of no return if he can’t start refinancing at lower rates across the entire GFG group.

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👋 Hi, I'm the founder of Ascern Advisers. We do Strategic & CFO advisory for businesses with Growth Potential. DM me or email me at david@ascern.com.au if you want to chat.