Sanjeev Gupta has put in that request for a government loan that we all knew was going to be coming. On the basis that cobbling together a metals business from the scrag ends of the industry is something that is difficult to make work. It depends upon the varied dowries that the former owners are willing to add, plus the government guarantees and loans that can be scared up by talking about strategic industries and job losses.
However, there’s a different question here. Gupta should, currently, be absolutely swimming in cash. So, what’s he need a loan for?
Industrial tycoon Sanjeev Gupta’s troubled GFG Alliance has asked the Government for an emergency loan of £170m to prop up his empire that includes Liberty Steel.
A letter to the Department of Business sent late on Thursday night requested the money for “working capital” and to “fund operating losses” being run up by the business.
However, ministers and officials are understood to be reluctant to provide cash.
Whitehall sources said there is concern over what one described as the “opaque” way GFG is structured.
Think back to the trigger for this crisis.
So, Gupta uses Greensill’s reverse invoice financing. In this Greensill pays Gupta’s suppliers on the nail then waits for the money until Gupta’s customers pay him. Nothing wrong with this as an idea or as a method of providing working capital. It does run into, as it has, that difficulty that there’s always a shortage of people who are worth lending money to but then that’s in Adam Smith, we know that.
Greensill then bundles up those debts – along with some from Vodafone and others – into bonds which it sticks in a fund at Credit Suisse and investors can partake of that pool to the tune of $10 billion at slightly above market interest rates. As we and they have found out perhaps below properly risk adjusted interest rates but still. Nowt wrong with that idea either.
That pool of those bonds made up of receivables is covered by trade finance protection, insurance. That insurance has run out/been denied/withdrawn. Tokio Marine and CS and others are going to be arguing about that for decades. But no insurance means the bond fund is dead, which means that Greensill’s necessity to repay is accelerated, which means that Greensill is bust.
OK, at which point Gupta can’t gain new reverse invoice financing. So, we might think that he needs to gain access to new working capital. Except, according to reports at least, that’s not what’s happening. What is happening is that Gupta’s customers continue to pay, as they were doing and should do. But Gupta’s not passing that on to Greensill for the supplier invoices that have already been financed.
What should be happening is that the customer payments flow through Gupta into Greensill – Greensill has, after all, already advanced the cash for the supplies to Gupta. But if Gupta’s not paying off those Greensill invoices as he receives those customer payments then what happens? Well, obviously, Greensill can’t then go pay off the bonds backed by the receivables, that’s clear. But more importantly, this means that Gupta’s cash balances are booming.
Greensill’s paid his supplier bills, he’s not paying Greensill, the cash should be piling up. So, why does Gupta need more working capital?
Answers on a postcard to 1 Horse Guards Road. They’d really, really, love to know.