Greensill Capital borrowed nearly 100 million euros from its own bank before the collapse

Greensill Capital borrowed nearly 100 million euros from its sister bank in Germany in the months leading up to its collapse, raising new questions about the ailing lender’s governance and regulatory oversight.

The London-based financial group, which went into administration this week, established a € 110million revolving credit facility at Greensill Bank in July 2020, according to testimony from founder Lex Greensill provided to the High Court in London this week. week. In February of this year, 90 million euros were exceptional.

Loans to related parties, which are subject to conflicts of interest, are subject to strict regulatory requirements under German law. These loans must be made on market terms and with the unanimous support of the lender’s boards of directors and supervisors. The German financial watchdog BaFin has the right to cap the amount of loans to related parties.

It is not known if Greensill Bank followed these rules. BaFin, the Association of German Banks, Greensill Capital administrator Grant Thornton and bank auditor Ebner Stolz declined to comment. Greensill Capital did not respond to a request for comment.

BaFin earlier this month froze the operations of the Bremen-based bank and deposit a criminal complaint to prosecutors, accusing the lender’s management of potential accounting manipulations.

Greensill Bank, which has raised € 3.5 billion in deposits from retail and municipal customers, is expected to be officially liquidated soon, according to people familiar with the matter.

While the bank’s retail deposits would be covered by a guarantee scheme, the prospect of the lender’s collapse has sent shock waves via the German municipalities, which held up to 500 million euros not covered by this deposit insurance.

As of 2019, the lender has been watched over by both BaFin and a private sector watchdog that oversees the private banking sector deposit insurance system in Germany, as questions about the rampant growth of its balance sheet and of its credit exposure increased.

BaFin created a task force in the summer of 2020 which investigated the bank and, in the second half of the year, hired KPMG to perform a forensic audit.

During the audit, the lender “was unable to prove the existence of any receivables on its balance sheet that it had purchased from the GFG Alliance group,” BaFin said earlier this week, referring to the group. industrialist of the metal magnate Sanjeev Gupta. BaFin added that there was “an imminent risk that the bank could become over-leveraged”.

The court document also shows how, when it failed to raise funds from private equity groups in October and November last year, Greensill Capital was attempting to reduce its exposure to GFG and meet its demands. insurer Tokio Marine for additional guarantees.

The Financial Times reported this week that during what Greensill described to potential investors as a “pre-IPO” funding round during these months, he painted a pink picture to redeem groups, claiming to want to “accelerate growth”.

However, the attempt to increase fairness during those months was one of the “specific steps” taken in response to what had become “kind of a perfect storm” for Greensill, according to the court document.

The company was under pressure to reduce its exposure to GFG, was aware of “liquidity difficulties within GFG’s business” and faced “significant collateral requirements” to renew its insurance, he said.

The capital raising was designed to provide “sufficient liquidity to facilitate a reduction of the Group’s exposure to GFG and meet the requirements of insurance guarantees,” he said.

“Until the end of December 2020, a private equity firm was expected to act as a benchmark investor in the capital increase,” the court documents say, but the potential investor did not did not follow through on the deal due to concerns about BaFin’s involvement with Greensill Bank and the concentration risk associated with GFG.

The group also attempted to raise funds from the Vision Fund of SoftBank, an existing shareholder, but refused to provide equity or debt due to “regulatory concerns” and “the absence of other shareholders. agreeing to co-invest ”.

The document sheds additional light on the problems encountered by Gupta’s GFG. “I understand from the CEO of GFG, Mr. Sanjeev Gupta, that GFG would almost certainly become insolvent if [Greensill] has not continued to fund future debts, ”Lex Greensill said in the statement, adding that Gupta had said so in a letter to BaFin.

“This is a problem not only for investors in debt or asset-backed assets linked to GFG entities, but also for [Greensill Capital] himself, ”he said.

Bloomberg News first obtained the witness’s statement.

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