Greensill Capital’s woes will reverberate widely | The Economist

Greensill Capital's woes will reverberate widely

The supply-chain financier's troubles highlight overlooked risks in the system

SUPPLIERS HATE being made to wait for the cash they are owed almost as much as their customers hate parting with it. What if high finance could help? Specialist firms have indeed sprung up, offering to pay suppliers up front, then cashing in their customer's cheque as the bill comes due weeks later. By charging fees or a spread, the intermediary takes a cut for what is in effect a loan. But the woes this week of Greensill Capital, a provider of such supply-chain financing, highlight some of the risks lurking in overlooked bits of the financial system.

Greensill, founded just ten years ago, boasted it could help companies “unlock capital”. Using techniques mastered by erstwhile slicers-and-dicers of subprime mortgages, it transformed the bills it took on into bond-like investments. These could be sold to outside investors, such as hedge funds, desperate to find some yield in a low-interest world. As long as the customers kept settling their invoices, a tidy profit could be made for investors-and the financiers behind all the alchemy. By 2019 Greensill claimed to have arranged financing worth more than $140bn to over 10m customers.

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