Let us interpret this from Gupta

Liberty Steel owner Sanjeev Gupta said his business owed “many billions” of pounds to failed lender Greensill Capital but he expected other financiers to back him.

Yep, it is.

The background – Greensill used to pay Gupta’s suppliers then wait for Gupta to get paid. Reverse invoice financing, nowt wrong with that. However, Gupta’s customers used to pay Gupta, who would then pay Greensill. Greensill is now bust and Gupta isn’t passing the money along as he gets it. Logical thing to do really – the administrators can wait after all.

He said his GFG Alliance business was using “self-help” measures to shore up its balance sheet while attempting to secure longer-term refinancing.

That’s what the self-help is. Collecting on sales and not passing along the amount that Greensill financed. This frees up cash to be paid on the more direct purchase of supplies to make the next lot of steel.

Essentially, Gupta was financing working capital through Greensill. Again, nowt wrong with that. Now that Greensill isn’t being paid Gupta has a bolus of working capital. Perhaps a little sharp there but understandable.

Mr Gupta’s first public comments since the collapse of his key funder came as his sprawling steel empire teeters on the brink after creditors sought a court application to wind up one of his businesses.

Bankers acting for Credit Suisse filed papers in the insolvency court to shut down Mr Gupta’s trading arm Liberty Commodities following the collapse of Greensill earlier this month.

And then there’s the problem. That bolus of working capital does actually belong to other folks and they’d rather like to have it. They’ll get it too – or Gupta will be bust.

Effectively Gupta has to refinance his working capital before the courts catch up.

Note that this is all assuming that there is a real and viable business in here. Even if all is entirely and wholly ticketty boo he’s still got this problem.

3 thoughts on “Let us interpret this from Gupta”

  1. The Meissen Bison

    Gupta has to refinance his working capital before the courts catch up.

    For businesses in good standing, factoring, invoice financing, call it what you will gives the lender the security of a self-liquidating exposure on the borrower. For Gupta, that option seems to have gone phut!

    Gupta can whistle for refinance unless he can offer some kind of unassailable security that his current creditors or Greensill’s can have no claim on and that refinance will likely be a form of lending unconnected with trading operations.

  2. Out of curiosity, why does he need a lot of working capital? I’d have thought that in a business like steel, where everything is a fairly constant flow of work/money/costs, you wouldn’t actually need a particularly big lump of cash to play with.

    I work for a fairly small engineering contracting outfit (contracting means that cash flow can be rather lumpy), I think our typical level of “working capital” is about 2-6% of our annual turnover. Its a bit stressful, the owners extract a little bit too much from the business, if they could leave 10% of our annual turnover in as working capital it would be much easier, but we’ve managed 20 years in this style without going under. Gupta’s cash flow should be smoother than ours – just how much working capital does he need?

    Obviously, all this assumes his business actually washes its face – if it doesn’t, he’s either going to have to change that or the laws of financial gravity will eventually exert themselves.

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