London – Supply chain finance funds (SCFs) face an uncertain future following the recent suspension and liquidation of several open-end mutual SCFs with links to the failed supply-chain finance company Greensill Capital, Fitch Ratings says in a new report. Fallout from the situation is likely to damage investor confidence in SCFs and may trigger additional regulatory scrutiny.
The five affected SCFs, four managed by Credit Suisse and one by GAM Investments, suspended redemptions in March 2021 due to uncertainty in the valuation of holdings linked to Greensill through the sourcing and structuring of assets. The uncertainty was heightened by the prior withdrawal of some of the credit insurance that had protected the funds’ underlying assets against obligor default. For example, the CS (Lux) Supply Chain Finance Fund’s insurance coverage decreased to 63% at end-January 2021 from 100% at end-2020.
SCFs relying on credit insurance face the risk of cover termination, which can trigger a rapid deterioration in their risk profile, especially if the portfolio has exposure to low-quality or unrated obligors. While defaults in trade and supply chain receivables are typically low, the credit quality of issuing entities can vary widely. Some trade finance structures may also be used in an effort to disguise fundamental challenges facing weaker companies.
SCFs may have material reliance on certain counterparties or platforms. The suspended SCFs had multiple layers of relationships with Greensill, according to press reports, which indicates a high degree of reliance. More broadly, SCFs reliant on a limited number of sourcing partners are likely to have heightened sensitivity to changes in asset supply.