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 SoftBankiv, 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 Europev.
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 Italyvii; 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 fundviii.
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).
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