Credit Suisse flags financial hit from Greensill collapse

Brenna Hughes Neghaiwi, Carolyn Cohn and Oliver Hirt
·5-min read

By Brenna Hughes Neghaiwi, Carolyn Cohn and Oliver Hirt

ZURICH (Reuters) - Credit Suisse warned it may have to book a charge over its dealings with Greensill, as scrutiny grows over its relationship with the British finance firm that collapsed into insolvency.

The Swiss bank has had to close around $10 billion of supply-chain finance funds that bought notes issued by Greensill, and which it marketed to clients. It is also trying to recoup a $140 million loan it made to the company last year.

"While these issues are still at an early stage, we would note that it is possible that Credit Suisse will incur a charge in respect of these matters," it said on Tuesday.

Greensill filed for insolvency last week after losing insurance coverage for its debt repackaging business.

Credit Suisse's share price has fallen more than 10% since it announced its supply-chain funds were suspended on March 1. It has paid investors about $3.1 billion in redemptions from the four funds so far, and said it would be announcing further cash distributions over coming months.

The bank also said on Tuesday that, "contrary to certain reports", its chief risk and compliance officer, Lara Warner, was not aware until Feb. 22 that insurance related to Greensill could expire on March 1.

Greensill founder Lex Greensill said in a court filing last week that he kept senior individuals at Credit Suisse, including Warner, informed about the funds' insurance coverage in the "weeks" leading up to its insolvency application on March 8.

The collapse has put fresh pressure on Chief Executive Thomas Gottstein who has been trying to move Credit Suisse on from a string of bad headlines, spanning a spy scandal that ousted predecessor Tidjane Thiam to a $450 million write-down on a hedge fund investment.

The level of oversight and risk management at the bank's asset management division is under scrutiny, particularly as Gottstein had ordered a review of the Greensill funds last year.

He said he was scrutinising the structure and internal position of the asset management unit, which is part of the Credit Suisse international wealth management division.

Gottstein said the closed supply chain finance funds had received an additional $800 million since their suspension.

This brought current funds to $1.25 billion on top of the amount already repaid to investors, and the funds continued receiving cash "on a daily basis" as the underlying receivables and notes reached their term.

"I cannot promise a specific result," he said at the Morgan Stanley Financials Conference, of efforts to return proceeds at maximised value to investors. "But I can promise that we will undertake all our efforts to reach the best possible outcome for our supply chain fund investors."

Supply-chain financing, or reverse factoring, is a method by which companies can get cash from banks and funds such as Greensill to pay their suppliers without having to dip into their working capital. See EXPLAINER:

Greensill had large exposure to one client, GFG Alliance, which is controlled by steel magnate Sanjeev Gupta and has started to default on its debts, according to Greensill's insolvency application. Gupta said on Friday GFG was in talks with Greensill's administrators on a standstill agreement to pause its debt payments to Greensill for an agreed period.

COSTS 'IMPOSSIBLE TO ESTIMATE'

The saga overshadowed an otherwise strong start to the year for Credit Suisse, whose shares opened up 1.8% as it said it had achieved the highest level of pretax income in both January and February in a decade.

Andreas Venditti, analyst at Bank Vontobel, said the bank was facing a loss of confidence among investors.

"Investors have been reassessing the risks to which the bank is exposed. In a worst-case scenario the bank faces years of litigation," he said.

"It is currently virtually impossible to estimate how high the direct costs of the case will be for Credit Suisse. Investors don't like uncertainty."

Three Credit Suisse investors, who declined to be named due to the sensitivity of the matter, told Reuters they were concerned about the fallout.

An investor in the bank's debt said the main financial risk was to Credit Suisse's reputation, which it said was a key asset for the wealth management business.

One Credit Suisse shareholder said it should fully compensate investors in the supply chain funds. A second said that, as well as reputational risk, it was worried about the effect on the bank's future asset-raising and its credentials in the growing business of socially responsible investing.

Credit Suisse declined to comment beyond its statements.

The bank has hired external firms to help deal with regulators and insurers amid questions over the contracts that underpinned Greensill's security. It has also recovered some $50 million of the $140 million bridge loan, it said.

Credit Suisse said that its asset management division, which sold the funds to investors, was working with Greensill's administrator, Grant Thornton, and with other parties to facilitate the recovery of funds.

Japanese insurer Tokio Marine, which provided $4.6 billion of coverage to Greensill credit notes through an Australian unit, is investigating the validity of those policies. A person with knowledge of the matter has said these were directly linked to the Credit Suisse funds.

(Reporting by Brenna Hughes Neghaiwi and Oliver Hirt in Zurich, and Carolyn Cohn in London; additional reporting by Simon Jessop in London and Tom Sims and Patricia Uhlig in Frankfurt; Editing by Michael Shields, Pravin Char and Alexander Smith)