Mired in controversies, can Sanjeev Gupta save Liberty Steel?
Sanjeev Gupta does not believe in miracles. However, the founder and chairman of GFG (Gupta Family Group) which houses Liberty Steel, probably wishes he did. Many feel that only a miracle can save him. Gupta, on his part, exudes confidence. “I will manage to get funds,” he says in a matter-of-fact tone. Speaking to Busines India, Gupta did not seem unduly perturbed over the fact that his main financier, Greensill Capital Management Co (UK) Ltd, has collapsed.
And the administrators are calling all its customers, including Liberty, to pay up their dues. Gupta simply says: “It is an unfortunate crisis but I will be able to come out.” Efforts are on to ensure that all the 11 sites of Liberty Steel in the UK remain operational. Recovering from Covid after battling the disease for weeks, Gupta has plans to pay up his dues. The votary of green steel confides that “I will get bridge finance. All plants which I bought were closed. I have worked hard and will not leave my workers in the lurch. They are my family”.
At stake are around 3,000 jobs across the group’s steel plants in the UK. Besides steel, there are another 2,500 workers at his other businesses, including power and hydro.
The genesis of the problem lay in the collapse of one of the group’s largest financiers, Greensill Capital Management Co (UK) Ltd. Greensill was incorporated in 2012, the same year in which Gupta embarked on his journey to become a steel magnate, by buying over Mir Steel, the mothballed unit in New South Wales (Australia). Lex Greensill, an Australian born billionaire, was the CEO and co-founder of the group.
Armed with a degree in law, the farmer’s son soon made waves in Citibank and Morgan Stanley, where he was employed. The former banker, who had made it big in supply chain finance, set up the Greensill group, which later became one of the financiers to GFG, besides other large companies.
The Greensill financial group had operations in the UK and Australia, besides having a bank – Greensill Bank DE. The group used to provide cash finance to units against receivables, later bundling the same by selling them to other financiers, who would recover the money once the bills were due. Known as factoring, this was a perfectly good business and worked quite well. Besides, Greensill also used to fund risky assets comprising future receivables, even before the sales were effected and bills raised.
Greensill also used to provide finance on future cash receivable by even predicting potential clients. Supply chain financing (reverse financing) especially the kind dependent on taking bets based on future cash flows, was a risky business. And, similar to what happened in the US sub-prime crisis, debts were bundled into documents, which were later placed with leading banks.
Greensill claims to have clients, including Coca-Cola and Vodafone, and has provided funds to the tune of $50 billion to several other entities, including GFG. The group had marquee investors, including SoftBank Vision Fund and General Atlantic, and was valued at about $3.5 billion. Lex Greensill also had friends in high places. David Cameron, former prime minister, was an advisor to Greensill.
Greensill’s woes galore
The problems with Greensill arose in July 2020, when Bond & Credit, the Australian firm which was taken over by Tokio Marine Management (Austrasia) Pty Ltd, one of the largest insurers, declined to insure about $4.6 billion of Greensill’s working capital. Greensill used to package short-term loans and sell them to Swiss bank Credit Suisse. Subsequently, Credit Suisse Fund froze $10 billion of its funds invested in Greensill in March, following the stoppage of the insurance. Fearing the worst, investors in Credit Suisse are demanding the return of their investments.
Greensill Bank DE was also facing a probe from German Financial Regulator, BaFin, which had also been probing the assets of the bank. It had appointed its representative to oversee the bank’s working since March. Faced with the prospects of going belly-up, Greensill declared itself insolvent and declared that its largest client, GFG, had started defaulting on debts. The amount owned by Gupta to Greensill is placed at $5 billion. Grant Thornton is one of the co-administrators.
Gupta, on his part, has appointed three experts to negotiate with the administrator and also source funds to tide over the immediate problems. However, in order to stay afloat, Gupta is required to immediately infuse funds in the UK operations. A request for £170 million (about Rs1,700 crore) was denied by the UK Government. GFG group has 5,500 employees in the UK, of which 3,000 are employed in Liberty Steel. One of the reasons given for the denial of the emergency loan was the group’s opacity.
The government said that, being the custodian of tax-payers’ money, it feared that, if money was given, there was no guarantee that it would stay in the UK and protect British jobs. Also what has raised hackles in the UK is that recently Gupta bought a house in London for £42 million which money, the critics argue, should be put back into the business. GFG, in a statement, said that other companies across the globe are doing well and it is taking prudent steps to manage resources.
On the face of it, Gupta should not have problems in raising funds. Steel prices are at a record high, having already crossed the prices witnessed in 2008. All Liberty steel plants, particularly those in Australia and US, are raking in good profits. With the US going in for a massive infrastructure spend over the next 8-10 years, demand for steel is unlikely to fizzle off in a hurry. Europe, which is still in recovery mode, will also be announcing similar plans for boosting infra demand. Steel companies in India, China and elsewhere in Asia are already reaping super profits. The bull cycle in steel may well stay for at least three years. Besides steel, Gupta also has a significant presence in aluminium and power.
Gupta was all set to come out with an IPO to raise funds for his venture and pay off a part of the debts to Greensill. There was an understanding that the loans from Greensill could not be called for at least another three years. Whether this can stand judicial scrutiny once the finances go belly-up is a matter which only the courts can decide. If push comes to shove, Gupta is certainly willing to battle it out in the courts.
In the UK, however, his earlier alloy steel plant taken from Tatas was facing challenges due to lower demand from the automotive sector and the aero sector during Covid. Gupta plans to convert the same into a regular steel plant. During a boom period, the project could well pay over the investments in 18-24 months. As far as the IPO plans go, they will have to be shelved. At least for the time being. Gupta will now have to wait for normalcy to return and the dust die down.
Some analysts also feel that despite the problems, the UK government may have to support the operations of Liberty Steel. During Covid, it can ill afford to see 3,000 employees being thrown out of work. But in the case of British Steel the government funded the receiver till the business couls be sold. Even if the administrators do step into Gupta’s shoes they may find it difficult to find a buyer for steel companies. Europe is still in lockdown mode and Tatas, having burnt their fingers with the takeover of Corus, will hardly risk taking back the plants they had sold earlier. Other groups like JSW and Vedanta could, but would they? That is a big question mark.
The only hope is that GFG group is given some more time to pay the loans. If not, it may well be a messy affair, with investors of Credit Suisse and Greensill all taking the legal route for salvaging their investments.