Greensill insurance mystery turns up the heat on Credit Suisse
Credit Suisse told investors the debt in its $7.3 billion finance fund was low risk because it was insured but the bank failed to ensure the policies would pay out, two sources told Reuters.
When Japan’s Tokio Marine, the company insuring the debt, declined to renew its coverage with Greensill Capital last month, Credit Suisse was forced to liquidate the fund and said this may have a material impact on its results and reputation.
The bank’s shares have fallen by almost a quarter in the past month as it deals with the fallout from Greensill and the impact of losses at its prime brokerage division caused by the stricken U.S. fund Archegos.
The debt Credit Suisse bought was issued by Greensill and backed by loans the supply chain finance firm made to companies. To manage its risk, Greensill took out credit insurance with a subsidiary of Insurance Australia Group (IAG). Tokio Marine took on the policies in 2019 when it bought the unit.
Supply chain finance is a form of financing in which suppliers can receive early payment of their invoices.
Credit Suisse assured clients in marketing documents that the debt in the supply chain fund was “low risk”. In one factsheet, it also said: “The underlying credit risk of the notes is fully insured by highly rated insurance companies.”
The sources told Reuters, however, that the bank did not communicate directly with Tokio Marine to confirm the insurer had no concerns about the validity of the policy or that the debt it bought from Greensill was the type the policies covered.
Instead, the Swiss bank relied on emailed updates about the policies from Marsh & McLennan, the broker that arranged them for Greensill, and did not hold regular discussions with Marsh to check whether the insurer was still intending to honour the contracts, the sources said.
Reuters could not determine what gave Credit Suisse comfort that its clients were covered by Greensill’s insurance and why the bank may not have engaged in due diligence beyond its limited checks with Marsh.
Two Credit Suisse sources told Reuters in May 2020 and again in January 2021, just two months before Greensill and the fund collapsed, that Credit Suisse had confirmed with Marsh that insurance cover was in place.
Credit Suisse declined to answer questions about what information it had sought about the insurance from Tokio Marine, Marsh, Greensill or others.
Greensill, Marsh and Tokio Marine all declined to answer questions about the coverage.
DUE DILIGENCE
Tokio Marine told Greensill in August 2020 that it was investigating whether some policies had been issued validly as an employee had exceeded his underwriting authority and it would not accept that the policies were binding pending the outcome of its inquiry, according to court filings in Australia.
According to emails between Marsh and Tokio Marine submitted in evidence in the Australian case, the employee, Greg Brereton, breached a number of internal procedures. Brereton did not respond to requests for comment.
The two people familiar with the matter said Credit Suisse was not informed about these concerns at the time.
Tokio Marine, Greensill and Credit Suisse declined to comment.
Three insurance experts interviewed by Reuters said Tokio Marine and Marsh were not under any obligation to tell Credit Suisse because even though the fund was beneficiary of the insurance, it was not a policy holder.
Neither Marsh nor Tokio Marine could have told Credit Suisse whether the debt it had bought from Greensill met the policy conditions because the bank did not provide a list of the specific bonds and ask for checks, three sources said.
The three insurance experts said Credit Suisse had dropped the ball if it did not make its own regular checks with Tokio Marine, given the crucial nature of the insurance to the value of the Greensill bonds it bought for its clients.
“Clearly they didn’t do their due diligence,” said Scott Levy, chief executive of Bedford Row Capital, which arranges bond issues. “If Credit Suisse was doing its job properly there is no way that they could not have identified these problems.”
INVOICED TRANSACTIONS
The head of Credit Suisse’s European asset management division and two other employees who worked on the finance funds have temporarily stepped aside, according to an internal bank memo, which did not state the reason for the changes.
Reuters has been unable to reach the managers for comment.
Credit Suisse has warned investors there was “considerable uncertainty” about how much money they would get back and said in its annual report that some clients had threatened to sue over the collapse of the fund.
Four sources told Reuters that Credit Suisse was considering compensating investors in the fund as there was concern the debacle could lead to wealthy customers turning their back on the bank.
When it ceased its cover in March, Tokio Marine said in a statement that Greensill was only covered for money it lent to companies backed by receivables – invoices they had received for goods and services delivered. Policies seen by Reuters say the debts should be backed by receivables.
However, Credit Suisse had also been buying Greensill bonds that lacked such collateral, according to corporate and legal filings. The bank declined to comment.
Reuters analysed the assets in Credit Suisse’s supply chain finance fund in 2019 and found it included some Greensill bonds not backed by receivables.
Reuters told the bank’s public relations department in July 2019 and in May 2020 this was the case. Credit Suisse declined to comment on the Reuters analysis on both occasions and again when contacted for this story.
Two Credit Suisse sources told Reuters in May 2020 and in January 2021, just two months before Greensill and the fund collapsed, that Credit Suisse had independently confirmed insurance cover was in place.
Credit Suisse’s fund managers did have occasional communication with Greensill’s broker Marsh, beyond its regular emails to the bank detailing the names of borrowers and exposure limits in the policy, the two sources familiar with the matter told Reuters.
The bank said in a June 2020 investor update that it had made insurance claims following the collapse of a healthcare provider whose debts the fund had bought via Greensill.
One of the sources said Marsh was involved in conversations with Credit Suisse about the claims. Reuters could not determine which insurer was involved or if the policy paid out.
