A short-selling hedge fund manager raised concerns with Australia’s financial regulator about Greensill Capital three months before the London-based financial group warned it could implode.
John Hempton of Bronte Capital said he wrote to the Australian Prudential Regulation Authority in November to flag Sydney-based Insurance Australia Group’s exposure to Greensill.
Greensill, a now-teetering supply chain finance specialist, which lends businesses money to pay their suppliers, relies on insurance to protect it against client defaults.
Hempton, known for his bets against companies such as Valeant Pharmaceuticals and Wirecard, raised concerns about the level of insurance extended to Greensill by IAG, calling it “potentially a solvency risk” for the group, in his letter to APRA.
Hempton also cited the risk held by Japan’s Tokio Marine, which in 2019 acquired IAG’s 50 per cent stake in trade credit underwriter BCC, which had been the main underwriter to Greensill. Both companies could be in a “world of pain”, he said.
On Monday, Hempton shared the letter in a blog post, noting that the regulator had dealt with him “professionally”. He added: “They asked me a few precise questions but gave me no indication as to whether they took these issues seriously or what they were thinking.”
Hempton said he was “originally not short any company mentioned, but I did not want to restrict my ability to trade”.
The matter came to a head in a dramatic legal showdown last week as Greensill tried to force Tokio Marine and IAG to extend two policies covering $4.6bn of working capital financing.
The court documents revealed that Tokio Marine notified Greensill of its decision to stop coverage in July, after it discovered that an underwriter at BCC had exceeded his risk limits, insuring amounts that added up to more than A$10bn (US$7.7bn). The underwriter was dismissed.
Failure to continue its insurance cover would be “catastrophic” for Greensill, putting at risk 50,000 jobs among its clients, its lawyers said. But the judge denied the injunction, citing Greensill’s decision to bring the matter to court at the 11th hour, when it had known of the underwriters’ decision not to extend the cover since the middle of last year. The loss of insurance triggered a series of events that have pushed Greensill to the brink of insolvency.
APRA said it had “no comment on these matters”.
In Monday’s blog post, Hempton said IAG’s exposure may not turn out to be large, given the BCC stake sale — unless it was forced in any future legal proceedings to renew the cover. Credit Suisse could be left “holding the bag”, he suggested.
Last week, the Swiss bank said it would wind down $10bn of supply-chain finance funds linked to Greensill, citing “the reduced availability of insurance coverage for new investments” as one of the reasons for its move.
A person briefed on Credit Suisse’s stance said the bank was “working under the hypothesis” that the insurance policies would pay out in the event of a default, as they had done in the case of NMC Health, the former FTSE company that collapsed last year. But they added: “This is one of the big questions outstanding.”
Credit Suisse declined to comment.
An IAG spokesperson highlighted the sale of its BCC stake as “part of IAG’s decision to focus on core general insurance, which meant the exit from a number of agencies which sold niche insurance products”.
A person familiar with the matter said that IAG’s exposure to Greensill had been raised between it and the regulator as part of regular discussions, and the exposure was not thought to be material.
Tokio Marine has declined to comment on its remaining exposure to Greensill.