Canary In the Coal Mine: Excessive Lending Practices of a Late Credit Cycle

The Archegos Capital and Greensill debacles are the latest clear examples of the excessive lending practices of a late credit cycle.

In the Archegos example the sheer size of the overall exposure, the speed of the unravelling and the number of financial institutions involved were eye-opening (Credit Suisse, Nomura, Goldman Sachs, Morgan Stanley, UBS, MUFG). In the Greensill example, it is alleged there was fraudulent behaviour by not only Greensill but by executives of insurers including IAG and QBE which at one stage had over $5b of exposure to Greensill loansⁱ and also by Greensill’s largest borrower, GFGⁱⁱ. GFG employs over 35,000 people and is one of the largest steel manufacturers in the world.

Archegos Capital is currently preparing for insolvency, as prime brokers to Archegos attempt to recoup more than US$10 billion of losses as they liquidated Archegos Capital’s investment positionsⁱⁱⁱ. We continue to see indicators of reduced risk appetite, including Credit Suisse severing ties with SoftBank^iv, and the market suspecting that Nomura is moderately reducing the size of its prime brokerage unit in Asia and more significantly in the U.S. and Europe^v.

The ramifications of Greensill’s collapse have also continued:

• In early May 2021, Wyelands Bank, owned by Sanjeev Gupta, CEO of GFG Alliance, and Greensill’s largest borrower, was reported to be sold or wound up, with overdue repayments on 80% of the company’s loan books;^vi

• In late May 2021, Italian Bank, Aigis Banca, impacted by investment products linked to invoices purchased from Greensill, was ordered to liquidate by the Bank of Italy^vii; and

• In early June 2021, SoftBank-backed construction startup, Katerra, filed for bankruptcy. Katerra borrowed more than US$400 million from Greensill, which was packaged into notes that were sold to investors in a Credit Suisse fund^viii.

Credit Suisse is also dealing with a growing exodus of executives to firms as another fallout. Whilst there has not been a significant immediate impact on global markets, we expect that there will inevitably be flow-on effects in the form of tighter credit markets. On balance, a tighter credit market should be a positive development for credit investors in the near term.

Notes: 

i. “Greensill – who is holding the bag?” (Bronte Capital, as at 8 March 2021).

ii. “Fraud concerns raised over Gupta group of companies” (WSWS, as at 12 April 2021).

iii. “Archegos prepares for insolvency as banks seek compensation for $10bn losses” (Financial Times, as at 6 May 2021).

iv. “Credit Suisse cuts risk as defections mount in wake of scandals” (Bloomberg, as at 28 May 2021).

v. “Nomura to spare little in cutting back prime brokerage in US, Europe” (Bloomberg, as at 9 June 2021).

vi. “Sanjeev Gupta bails out of ailing Wyelands Bank” (Australian Financial Review, as at 14 May 2021).

vii. “Italian bank collapses on exposure to Greensill and GFG” (Financial Times, as at 25 May 2021).

viii. “SoftBank-backed Katerra Files for Chapter II” (The Wall Street Journal, as at 7 June 2021).

Important information

This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided by Aura Group and related entities and is only for information and general news purposes. It does not constitute an offer or invitation of any sort in any jurisdiction. Moreover, the information in this document will not affect Aura Group’s investment strategy for any funds in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Aura Group makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this information. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. You should not construe any such information or any material, as legal, tax, investment, financial, or other advice. This information is intended for distribution only in those jurisdictions and to those persons where and to whom it may be lawfully distributed. All information is of a general nature and does not address the personal circumstances of any particular individual or entity. The views and opinions expressed in this material are those of the author as of the date indicated and any such views are subject to change at any time based upon market or other conditions. The information may contain certain statements deemed to be forward-looking statements, including statements that address results or developments that Aura expects or anticipates may occur in the future. Any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected in the forward-looking statements. This information is for the use of only those persons to whom it is given. If you are not the intended recipient, you must not disclose, redistribute or use the information in any way.

Aura Group subsidiaries issuing this information include Aura Group (Singapore) Pte Ltd (Registration No. 201537140R) which is regulated by the Monetary Authority of Singapore as a holder of a Capital Markets Services Licence, and Aura Capital Pty Ltd (ACN 143 700 887) Australian Financial Services Licence 366230 holder in Australia.