Factoring Prospective Receivables? WTH?

In case you’ve missed the Greensill Capital masterpiece debacle. Here are couple of articles with good, clear explanations to help you get caught up.

Greensill didn’t just finance Bluestone’s supply chain

Imaginary invoices are hard to collect

The quick version is Greensill financed receivables (factoring) and payables (reverse factoring). For receivables, they paid the company now at a discount and collected the full amount from the customer later. For payables, they paid on time and collected from the company at a premium later. This isn’t new. My perception, having been involved with factoring a little, is that it tends to be either a well-established practice in certain industries or a bit of a last-ditch lender. But it is short-term financing with collateral. The collateral is the receivable obligation and typical terms are 30-90 days. Definitely short-term.

In Greensill’s case with Bluestone, they appear to be lending against PROSPECTIVE customers and FUTURE invoices. What? I picture a pitch like this: “Look Mr. CFO. We know you don’t sell to Bob’s Bait and Sushi Limited right now, but someday they may decide to do business with your company. How much do you think they would spend? $10 million? Ok, we’ll loan that to you on 90-day terms. Just pay us the discount (interest). If you don’t pay it back in 90 days because not only have you not sold them anything, no one has even called up Bob’s, we’ll roll the loan for another 90 days.”

As Matt Levine put it in Greensill didn’t just finance Bluestone’s supply chain:

Greensill basically gave Bluestone a payday loan for a job Bluestone hadn’t yet applied for.

It appears as though Greensill also managed to package this mess up and securitize it, selling it as receivables loans to Credit Suisse. That part of the story is murky, but it’s hiding in there. Part of the murk is also an apparent conflict of interest at Greensill involving metals magnate Sanjeev Gupta and his collection of companies, called GFG Alliance.

Now Greensill is insolvent and Grant Thornton has been called in to help. Apparently, they are stumbling across these prospective receivables and try to collect them. It’s not going well.

As of now, it’s not even fraud…yet. The securities sold could constitute fraud if Credit Suisse was unaware of the “prospective” part. Bluestone is suing because it believed this was long-term financing, but there’s no mention of how they booked the transactions on their financial statements. And there’s enough murkiness here that I suspect fraud will rear its ugly head eventually. For all this, we learn that somehow a fake receivable isn’t a fake receivable if everybody agrees beforehand they are fake and you just change the name.

The last paragraph of Imaginary invoices are hard to collect was perfect so I’ll quote it in full:

I do not envy Grant Thornton. Their job right now is pretty much going around to companies, presenting them with invoices, and getting laughed out of the room: “That’s not our invoice, we’ve never even heard of Liberty Commodities or Greensill, get outta here.” And then they go back to Greensill with their findings and get laughed out of the room again: “Of course it’s not their invoice, they were just a potential customer, how could you be so naive?” And then Grant Thornton has to tentatively ask, “Well, okay, but then who is going to pay this invoice?” And then there is a long awkward silence.