The media loves stories of the rise of underdogs, of entrepreneurial spirit and corporate derring-do — so has been the story of Sanjeev Gupta and the meteoric expansion of his GFG Alliance in recent years.
That rise has almost defied the gravity of conventional business in a string of acquisitions, often of defaulting or bankrupt entities, and their seemingly miraculous turnaround into viable businesses.
We have covered the GFG Alliance’s takeover of various enterprises, including the $500 million purchase of Rio Tinto’s Dunkirk aluminum smelter — still the largest in Europe — in late 2018. More recently, we covered the group’s purchase of several former British Steel assets, including its Rotherham steel plant and various downstream operations, including the Ascoval steel works in northern France and its rail mill.
Ascoval uses electric arc furnace technology to process scrap steel. The plant has an annual capacity of 600,000 tons. It supplies raw material to Hayange, which produces over 300,000 tons of rail track a year and is considered a strategic asset by the French government because of its position as prime supplier to the French railways.
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GFG Alliance and financial scrutiny
Media reports last week indicating that the GFG Alliance’s main source of finance, Greensill Bank, is on the brink of collapse will probably not come as a total surprise to anyone following the history of what has always been a very opaque, almost murky source of finance.
The speed of events has spurred competitors to circle in the hope the more saleable bits of Gupta’s empire may shortly be up for sale as the group seeks to bolster its finances.
As for Greensill Bank, apparently the European Central Bank (ECB) is investigating the firm’s financial stability. The Financial Times reported the bank is in talks with the $455 billion US investment group Apollo about a possible takeover of parts of Greensill in a potential $100 million deal.
Apollo’s Athene finance arm is said to be most interested in Finacity, which Greensill acquired in 2019 and provides services that underpin the securitization of invoices. The Financial Times says it is very unlikely Athene’s interest would extend to maintain finance for GFG Alliance.
The crisis seems to have been accelerated by Credit Suisse decision to abandon €10 billion ($8.4 billion) of supply chain financing linked to the group. In addition, Germany’s banking watchdog BaFin froze its Bremen-based bank and filed a criminal complaint alleging balance sheet manipulation.
Supervisors at the ECB asked banks to provide details of outstanding loans to Greensill and GFG, the Financial Times reported.
GFG’s position appears precarious if it does not find alternative and immediate sources of finance.
Greensill Bank provides about €2 billion of financing to the group, with other supply chain facilities provided by other parts of the Greensill group.
GFG’s Liberty Steel operation in the UK is still operating normally. However, the Rotherham plant has questions over how it will finance operations after the current production run comes to an end on Friday.
Some scrap suppliers have apparently already started to reduce financial exposure. They are asking for cash upfront or not renewing contracts on the advice of their trade credit insurers.
Maybe fortunately for the aluminium market, GFG’s acquisition of the Dunkirk aluminium smelter was one of Gupta’s few forays in conventional financing. A $350m loan from a number of banks backed the deal, the firm’s website states. The backers included BNP Paribas, ICBC, ICBC Standard Bank, Morgan Stanley, Natixis, Barclays Bank PLC, Bank of Montreal and Royal Bank of Canada.
As such, it probably stands outside the immediate funding crisis facing the steel division.
As if to add the final nail in the coffin, the Financial Times reported that GFG’s only other major source of finance — UK lender Wyelands Bank, which had funded Gupta’s wider business empire through a network of shell companies — has been ordered by the UK’s Prudential Regulation Authority last week to return depositors’ money.
Not surprising, then, that competitors are circling hoping for fire sale selloffs.
Steel prices are up and margins are OK. GFG’s French operations, in particular, serve as an attractive integrated operation and guaranteed outlet to the French state.
Yet, there is so little visibility into GFG’s financial arrangements. No one, apart maybe from Gupta and V Ashok, his CFO, have any idea just how precarious the group’s position may be.
That position does nothing to reassure the some 35,000 workers the firm employs around the world.
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