The Telstra Corporation Ltd (ASX: TLS) share price, along with numerous other Australian companies, will be watched with a close eye at the moment. This comes as the Greensill Capital collapse ripples through to its clients.
What is Greensill Capital and what happened?
Founded in 2011 and headquartered in London with offices globally, Greensill Capital is the supply-chain financing brainchild of Lex Greensill. The firm tweaked an old concept called 'factoring'. This is where a supplier fast tracks its receivable payments through a financier. The financier later recovers the payment from the larger corporation.
The tweak to the model meant that responsibility for the debt shifted from the supplier to the company. This enabled Greensill to change the terms of repaying debts. Much like the housing collapse in the GFC, Greensill proceeded to bundle and securitise these supply chain debts and sell them to investors.
Cracks propagated in the financing business last year. Greensill became reliant on a handful of large corporations, which meant the risk profile was quite concentrated. As a result, when COVID-19 impacts were felt by these businesses, insurers were made to cough up the costs.
Hence, with a mix of investors running for the exit from the securitised debts and insurers refusing to renew coverage for the debts, Greensill is left on the brink of insolvency.
Impacts on other ASX listed companies
As reported by The Australian Financial Review (AFR), the barrage has fallen on Greensill's clients. Those in the firing line include Telstra, CIMIC Group Ltd (ASX: CIM), and the Australian Rail Track Corporation (ARTC).
The AFR stated:
Invoices for payments owed by the three companies were among the top 10 holdings at the end of January of four supply chain finance funds worth $13 billion that propped up Lex Greensill's empire and were managed by Credit Suisse.
Additionally, Telstra has purportedly assured its suppliers that any outstanding accounts arranged through Greensill's early payment product will be covered by the telecom's own cash. At the end of December, this amount equated to $98 million in payable invoices.
CIMIC and ARTC were also in Credit Suisse's "high income" fund which will be liquated. The multinational contractor, CIMIC, had a finance balance of $144 million at years' end. Meanwhile, ARTC has not provided any information on whether it used Greensill's payment scheme for suppliers.
In early February, we covered CIMIC's controversial use of reverse factoring for payments to suppliers.
Telstra and CIMIC share price recap
Greensill's undoing has gained attention over the last week. So it might be worthwhile looking at how its client's share prices have responded.
Telstra's share price has lost a mere 0.3% in the last month. The company's $1.259 billion in cash and cash equivalents is more than enough to cover the invoices to its suppliers. This might be helping the share price remain largely unscathed by recent revelations.
In contrast, CIMIC has been hit by a 25% fall in its share price over the last month. The construction company's use of payment financing has garnered plenty of backlash recently. Some suppliers have reported that CIMIC forced them to use the supply chain financing system for payments. Given CIMIC's high debt to cash ratio and the ongoing opaqueness of Greensill's use, investors appear concerned.
