Bluestone Resources, a coal company owned by Gov. Jim Justice and his family, filed a federal lawsuit earlier this week against London-based financier Greensill Capital.
The suit alleges Bluestone was the victim of fraud, and that it now faces a precarious future because of serious “reputational damage” thanks to its dealings with Greensill.
The crux of the relationship involves an $850 million loan that was positioned as a long-term arrangement by a lender that otherwise dealt with short-term, supply-chain financing.
Bluestone and a handful of other clients accounted for the vast majority of Greensill’s portfolio that touted $150 billion of financing in 2019.
Everything changed, however, when Greensill filed for insolvency on March 8. That move has resonated globally given Greensill’s prominence in a $1.3 trillion business of helping companies pay suppliers with borrowed money.
Analysts and finance experts predict a worldwide shift in the scope and practice of supply-chain funding — the repercussions of which might not be fully quantified for years.
Mike Pagano is a professor and the chair of finance at the Villanova School of Business.
An expert on financial institutions and international finance, Pagano answered some questions from the Gazette-Mail regarding a complicated topic for the uninitiated.
Q: What’s your take on the lawsuit?
A: “I think this type of lawsuit will be hard to be supported in a court of law because Bluestone’s financial managers should have taken into consideration the risk of depending to a large extent on one type of lender [Greensill] which is also dependent on continuously financing itself via short-term debt securitizations.”
Q: Is there anything unsavory or unethical about Greensill’s business model?
A: “No, what Greensill was doing is essentially a very old model called ‘trade credit financing’ or ‘factoring’ although they were primarily focused on a firm’s accounts payable rather than a firm’s accounts receivable. So, it is a perfectly legitimate business to be in, albeit it tends to have much higher credit risk than traditional lending. So, financially weaker borrowers are more likely to use Greensill’s service than financially strong borrowers.”
Q: Was Greensill always built on a shaky foundation?
A: “It was definitely built on a different foundation than a traditional bank which uses safe, reliable deposits to finance its lending business.
“Greensill, like all specialty finance firms, doesn’t have access to these types of deposits and thus must rely on other sources of financing, such as an investor’s equity capital or a bondholder’s debt capital.
“Where Greensill was riskier than many firms is that they chose to finance much of their lending with securitizing claims on their short-term loans rather than obtaining long-term debt or equity capital. This type of money can dry up very quickly when creditors perceive the quality of Greensill’s loans is declining.
“This ‘hot money’ therefore creates added liquidity risk for Greensill and thus it’s not surprising they are in a difficult situation now because ‘hot money’ flees very quickly when credit quality deteriorates.”
West Virginia businesses vying for grants
Nine businesses in West Virginia — including a Charleston printer-and-copier business, along with the state’s lone manufacturer of potato chips — are competing in a nationwide contest.
They’ve entered the FedEx Small Business Competition, a contest for a $50,000 grant along with assistance for online ordering and shipping from the shipping magnate.
An entrepreneurial panel will choose the winner from among 700 businesses that receive the most online votes on the contest’s webpage.
Voting began on March 10 and runs through March 24. The top 100 finalists will be announced March 31, followed by the final 12 on May 10. Anyone age 18 or older with a valid email address is eligible to vote.
The businesses in the competition from West Virginia:
- Impression Products (Charleston);
- Mister Bee Potato Chips (Parkersburg);
- BBQ House (Glenville);
- Precision Design Lawn Care and More (Terra Alta);
- Hillbilly Cycle Sales (Princeton);
- EveryBody Fitness (Barboursville);
- Appalachian Furnishings (Pineville);
- Multitude Foods (Scott Depot); and
- Thor Tiger Team (Glenville).
In addition to the $50,000 grant and $7,500 toward FedEx Office print services for the first-place winner, the second-place finisher will receive a $30,000 grant and $5,000 in services. Ten other businesses will each receive a $15,000 and $1,000 in FedEx offerings.
To vote, visit the contest homepage at www.fedex.com/en-us/small-business/grant-contest.html.
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