Sanjeev Gupta’s GFG Alliance faces scrutiny from UK’s Serious Fraud Office

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The UK’s Serious Fraud Office (SFO) has gone public investigating charges that Sanjeev Gupta’s GFG Alliance (Gupta Family Group Alliance) holding company and subsidiaries, such as Liberty Steel, has been involved in fraud, fraudulent trading and money laundering.

As such, that has almost certainly put the end to refinancing efforts, at least for parts of the group in the UK.

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Fraud charges against GFG Alliance

Iakov Kalinin/Adobe Stock

The alleged fraud occurred between GFG and its main financial backer, failed finance firm Greensill Capital.

Greensill provided what is termed supply chain trade finance. Essentially, they paid GFG’s suppliers and funded the group prior to securing payment months later from GFG’s customers.

The SFO had been tracking GFG for a year, apparently. But after the Financial Times revealed in April a series of companies named on invoices that GFG sent to Greensill in exchange for cash had denied ever doing business with Gupta’s group. Gupta later told the Financial Times that one such company had been listed as a “prospective” customer. GFG provided financing on that basis, he said.

Interesting concept … what finance do you need for a “prospective” customer?

Greensill is said to be exposed to GFG to the tune of some $5 billion when it collapsed in March, leaving its backer Credit Suisse facing huge losses. Credit Suisse provided funding to Greensill on behalf of clients through a fund that collateralized such trade finance debts and yielded attractive return.

The Swiss bank in turn is seeking to wind up several Liberty Steel companies in an effort to recover money for its investors. Liberty went seeking £170 million of emergency loans from the British government.

However, the government declined. The government said the firm’s financial structure and activities were so opaque  it could not be confident the funds would not go tow businesses abroad.

Assurances have been given, though, that the government will step in if — or more likely, when — Liberty goes bust in order to protect the some 3,000 jobs and preserve the significant steel assets in the UK.

Next step for GFG Alliance

In previous posts we have questioned GFG and its subsidiaries’ opaque and complex company structures. We have also noted its extensive reliance on largely private enterprises to fund, at high interest rates, its acquisitions and working capital.

GFG did not just rely on Greensill, although it was by far the largest source of funds.

San Francisco-based fund White Oak Global Advisors has also been a sometimes backer and is reportedly still a creditor to the group. That could explain why it had seemed keen, at least up to the point the SFO investigation announcement, to explore refinancing terms with GFG. Its motivation, in part, no doubt, came with the goal of getting back what GFG owed it.

GFG’s empire will almost certainly break up. Some parts, such as the aluminum smelter at Fort William in Scotland have been thrown something of a lifeline by the Scottish parliament. Both the Scottish smelter and ALVANCE Aluminium Dunkerque, Europe’s largest smelter, are probably trading profitably in today’s high aluminum metal price environment — at least for now.

Wait and see

Liberty’s Hayange steel mill in Moselle, France, is an attractive asset, as it manufactures a wide range of steel rails for nationally significant infrastructure clients, including France’s national rail operator SNCF and RATP, the operator of Paris’ metro system. Paris is unlikely to let either ALVANCE Aluminium or the Hayange mill fail.

However, like the UK government, it will likely wait to see how the group fares before stepping in with the administrators.

For now, GFG Alliance and Liberty limp on, but time and options are fast running out. The fact the group’s financing model and company structure has led to its demise only goes to vindicate many who had criticized the group despite its earlier hubris and apparent success.

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