The intertwined empires of Greensill and Gupta had for years raised concerns internally

The business empires of metal magnate Sanjeev Gupta and financier Lex Greensill have relied on each other to fuel their growth. But for years, executives and advisers close to the two entrepreneurs urged the two men to decouple their activities, according to people familiar with the matter.

They failed to do so. Now Mr. Greensill’s company, Greensill Capital, is insolvent and Mr. Gupta’s conglomerate, GFG Alliance, is scrambling to survive.

Greensill’s the implosion trapped a multitude of financial companies including Credit Suisse Group AG, which frozen $ 10 billion in funds he manages with the firm. Regulators have support for supervision of the German Bank of Greensill after saying that a special audit found suspicious accounts linked to Mr Gupta. The move took place despite a last attempt to

SoftBank Group Corp.

9984 -2.32%

, Greensill’s the largest external investor, to intervene directly with the regulator.

For GFG Alliance, which houses the steel, aluminum and energy activities of the Gupta family and generates annual sales of $ 20 billion the main source of funding suddenly dried up.

Mr. Greensill created Greensill Capital in 2011 to provide supply chain finance to customers—A form of short-term loan to help businesses pay their suppliers on time.

Mr. Gupta – formerly in commodities trading – entered the steel business in 2013 in hopes of reviving unloved industrial assets. He discovered an industry in constant need of working capital, in which suppliers and customers often pay late and traditional lenders avoid.

“When I started my journey in 2013, there was [sic] few options available in terms of traditional funding… Greensill came as a breath of fresh air, ”Gupta said in a podcast for GFG staff that was released publicly last Saturday. GFG says it is looking for other sources of funding and that its companies do well in strong markets for steel and other products.

MM. Greensill and Gupta, the latter through GFG, declined to comment for this article.

In 2016, GFG purchased an aluminum smelter and its hydropower supplier in Scotland, one of GFG’s many major deals funded by loans from Greensill.


Photo:

Russell Cheyne / Reuters

Mr Gupta, the son of an Indian industrialist with the ambition to make steel in a more environmentally friendly way, is charismatic, charming and sometimes invited his staff to family dinners, people said. know him. Mr Greensill, who grew up on a farm in rural Australia, is a more serious figure, but also an ambitious and aggressive risk-taker, people who have worked with him have said.

People close to the couple’s relationship said Mr Greensill often visited Mr Gupta to talk business in his large, glass-walled office overlooking Sydney Harbor, as the banker invited the industrialist to his family farm , where they were discussing the agreements on a hill overlooking Sydney Harbor. field.

Greensill executives attended big parties Mr Gupta threw at his rented mansion in an expensive part of Sydney, some people said.

In August 2016, Mr. Gupta bought a stake in Greensill, before selling it later that year.

That year, Mr Gupta also struck his most ambitious deal to date, purchasing an aluminum smelter and its hydropower supplier in Scotland.

The £ 330million, or $ 454.8million, deal was one of several major GFG deals funded by loans from Greensill. In 2017, GFG accounted for 69% of the lender’s revenue, according to an internal note from SoftBank’s Vision Fund, reviewed by the Journal.

On a phone call with SoftBank, Gupta explained that while traditional lenders were cheaper, Greensill was much faster and more flexible, according to a summary of that conversation in the memo.

Increasingly, GFG executives and advisers were concerned about the use of Greensill. In 2018, they persuaded Mr. Gupta to consolidate his holdings into one group, release a single set of financial data, incur long-term debt with banks and ultimately go public, according to people familiar with the matter.

But the following year, GFG made its biggest acquisition to date, paying 740 million euros, or $ 868.1 million, for seven European assets of the steel giant.

ArcelorMittal

PLC.

GFG had talks with U.S. investment bank Jefferies about a potential bond sale to help fund the deal, but dropped the idea when Mr. Gupta hesitated on certain conditions, people said.

In general, he disliked covenants, which often come with loans and bonds and put conditions on a borrower. In particular, Mr. Gupta spoke out against conditions that prevented him from moving money around his empire, one of the people said.

GFG transferred tens of millions of dollars, for example, from its profitable Australian businesses to less lucrative UK companies and to help finance the 2017 buyout of a steel plant in South Carolina, people familiar with the matter said.

Ultimately, the acquisition of ArcelorMittal’s assets was primarily funded by Greensill, the people added.

Jefferies declined to comment.

A spokesperson for GFG said it has over time used a range of financing tools, including bonds, bank loans and asset-based finance.

Mr Gupta has previously said he wants to list his Australian and US assets. However, the bankers of

JPMorgan Chase

& Co., which was to help list Australian assets, told Mr Gupta he needed to reduce his reliance on short-term funding first, according to a person familiar with the matter.

JPMorgan declined to comment.

GFG did not list any companies.

As of September 2019, Greensill was lending approximately $ 7.4 billion to Mr. Gupta’s businesses, according to a Greensill document reviewed by the Journal. That month, Mr. Greensill told the Journal in an interview that he was a “big fan” of Mr. Gupta and his attempts to revive the industry in the West.

At the same time, senior management at Greensill was receiving regular updates on the company’s exposure to GFG and Mr Greensill told executives he hoped to “overtake” GFG, according to people familiar with the matter.

But GFG has remained critically important to Greensill, typically generating around a third of its total revenue, according to internal Greensill documents reviewed by the Journal.

Greensill was also under pressure from German banking regulator BaFin to reduce Greensill Bank’s exposure to GFG, according to a statement, reviewed by the Journal, that Greensill made as part of the company’s insolvency process. A September 2019 internal Greensill document reviewed by the Journal shows that 85% of the bank’s assets were linked to GFG.

Last fall, Greensill hired banks to help him raise up to $ 1 billion in new equity. But in December, a private equity firm that was scheduled to invest pulled out in part due to BaFin’s concerns about exposure to GFG, according to Mr Greensill’s statement regarding the insolvency filing.

Mr. Greensill’s statement describes a Catch-22.

His company’s strong exposure to GFG was putting the future of the entire company at risk, but reducing that exposure quickly could undermine Mr. Gupta’s business and hurt Greensill as well.

“I understand from GFG CEO Mr. Sanjeev Gupta that GFG would almost certainly become insolvent if (Greensill) did not continue to provide funding,” Greensill said in his statement.

Earlier this year, Mr. Gupta, Mr. Greensill and Rajeev Misra, the head of the SoftBank Vision Fund, planned to visit Frankfurt in a last-ditch effort to allay BaFin’s concerns, according to people familiar with the matter.

Due to Covid-19 travel restrictions, the meeting was held online on February 1.

It didn’t go well. BaFin maintained its insistence that Greensill cut Mr. Gupta’s business loans, the people said.

In March, Credit Suisse froze the investment funds that had fueled Greensill’s loans, saying it was unsure of the exact valuation of some of the assets within them. Greensill filed for insolvency within days.

This year, GFG had planned to diversify its borrowing beyond Greensill, Mr. Gupta said in his podcast. “It was a work in progress,” he said. “But unfortunately Greensill collapsed.”

Write to Alistair MacDonald at [email protected] and Duncan Mavin at [email protected]

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