Four years ago, Greg Brereton, an underwriter at a little-known Sydney insurance firm, exchanged emails with Lex Greensill, the founder of a specialist lending business that was flying high.
After requesting agreement on £23mn of insurance cover for loans to a waste plant operator based outside Hull, Greensill wrote: “Thank you, Greg, for your confirmation that the below is in order.” Five minutes later, Brereton replied: “Lex as discussed I can confirm.”
The brief interaction, included in court filings, is a glimpse of a critical relationship between the financier and the insurance executive whose firm, the Bond & Credit Co, eventually provided $10bn of coverage against the risk of default on Greensill Capital’s supply chain lending — with the financial risk held by the big global insurance and reinsurance firms sitting behind BCC.
When Brereton was fired and an investigation launched into his dealings with the lender, Greensill failed to find insurance elsewhere and collapsed, sparking a financial and political scandal.
That also left an urgent question for Greensill creditors struggling to recoup billions of dollars of client money: would the existing patchwork of insurance contracts pay out?
Just days after Greensill filed for administration in March 2021, BCC’s parent company, Japanese insurance group Tokio Marine, said it was questioning the validity of the insurance cover in the wake of regulatory investigations. In April this year, it said it had concluded that the insurance policies had been void from the start because “matters material to the underwriting of the policies were fraudulently misrepresented to BCC by Greensill”.
Credit Suisse, which had $10bn of funds linked to Greensill loans, fired back that the insurance policies were “valid and that the insurers’ claims are unfounded”.
But in August, the bank told its clients that it expected insurers to challenge the validity of “most . . . perhaps all” of its 18 separate insurance claims, which amount to $2.2bn of exposure.
Greensill creditors are now turning their attention to proceedings in Australia’s federal court where a series of insurance claims by Credit Suisse and other creditors have been brought together into what is widely regarded as a test case for the billions of dollars of Greensill coverage. Pre-trial hearings are due to commence in November.
“To the extent that the insurance is found to be invalid, this will inevitably lead to even further delay and uncertainty surrounding repayments,” said Natasha Harrison, managing partner of law firm Pallas, which is representing some Credit Suisse investors.
One Credit Suisse investor following the case said they took it as a bad sign for the strength of the insurance cover when, early in the scandal, the Swiss bank identified three particular Greensill borrowers — Sanjeev Gupta’s GFG Alliance, construction company Katerra and mining group Bluestone — where it could struggle to recover funds.
“In my head I was wondering, why are they doing this if the insurance is solid?” said the person.
A person familiar with the bank’s view said the identification of “focus areas” was driven by the size and complexity of the exposures, rather than the soundness of the insurance.
Filings for the various claims reveal the difficult arguments involved.
Insurance Australia Group, whose subsidiary Insurance Australia Limited is named on the key insurance policies, told investors last year that the sale of its 50 per cent stake in BCC to Tokio Marine in 2019 had eliminated its exposure to Greensill. Tokio Marine has said it does not expect any material financial impact from Greensill.
IAL has made a series of arguments that the Greensill loans were beyond the underwriting authority of BCC, an agent that offers cover on behalf of insurers within set parameters. For example, IAL said BCC did not have permission to underwrite policies outside Australia on its behalf.
It also argues that, following a disagreement in 2017 over proposed policy wordings, Greensill should have been aware that IAL and its reinsurer Scor “did not approve of the wording and structure” of its central insurance contract.
BCC makes the case that it was “induced to enter into the relevant insurance instruments by reason of non-disclosures and misrepresentations” from Greensill.
In documents prepared for the legal proceedings, it cites a receivables lending programme agreed between Greensill and Bluestone, a coal mining business owned by the family of West Virginia governor Jim Justice.
BCC alleges that Greensill selected Bluestone customers for the programme “based on their perceived attractiveness to an insurer (including their credit rating) and not by reference to the likelihood that they would actually purchase goods and services and generate actual receivables”.
It contrasts this with representations it said Greensill made to Brereton in late 2018 that funds advanced would be based on invoices issued by Bluestone or “the value of bona fide purchase orders or firm commitments that Bluestone had received”.
How credit insurance works
Credit insurance, or trade credit insurance, covers a company against non-payment by a debtor. If they do not pay, the insurer does. Where banks other institutions lend money to companies against their trading activity, the insurance covers the lender — or their investors — against non-payment.
In the case of Credit Suisse, loans extended by Greensill Capital were packaged up into “notes” sold to wealthy clients. The insurance was there to protect these end-investors against loans turning bad.
Credit Suisse told investors in its main Greensill fund that the notes were guaranteed by insurance, but with a warning that payment might not be “in full and on time”, according to a document seen by the FT.
One important aspect of the Australian legal battle is the extent to which insurance covers less straightforward lending such as on “future receivables”, or payments for expected trade that has not yet happened.
Lex Greensill told British MPs in a hearing last year that insurance cover would protect investors from non-payment of loans, even in the case of fraud.
Elsewhere, the insurer argues that when Greensill was seeking insurance coverage for lending to Catfoss Renewables — the Hull-based waste plant operator — it did not disclose that “the facility had already been drawn down and the majority of the funds used to make payments to directors of Catfoss”. It also did not disclose that Greensill had acquired an option to purchase a 25 per cent stake in Catfoss, according to the filing.
A person familiar with Lex Greensill’s view accused Tokio Marine of “trying to wriggle out of obligations that were validly placed with them” and highlighted the premiums paid for the coverage.
Further pleadings and disclosure are to come, but one key aspect of the case will be the testimony of Brereton, who has maintained public silence since the scandal broke.
Some argue Credit Suisse should not hang around for the outcome. “What Credit Suisse should be doing is repaying its clients now and recouping any losses subsequently,” said Harrison.
But people familiar with the bank’s view say regulators would force it to hold more capital against potential investor losses if it set this precedent.
Tokio Marine, Credit Suisse, Scor, and Greensill’s administrator declined to comment on the proceedings.