After the collapse of Credit Suisse fund partner Greensill, it is questionable whether myriad insurance policies will pay for the damage. A lawsuit in Australia, where the stakes are high is a test case for the bank.
Investors in the Greensill funds face a lengthy legal battle with insurers and problem debtors until they can recover their money. The payout depends on whether money can be recovered from troubled debtors and whether insurers are willing to pay for the bonds they cover. Without money from either of these sources, investors will be left holding a bad with large losses.
So car, Credit Suisse has so far been able to recover over $7 billion of the more than $10 billion in assets, including cash positions, originally blocked in the funds.
Main Insurer Unimpressed
Among insurers, Japan's Tokio Marine is playing a key role, with the main insurer of the Greensill funds not expecting to have to pay out anything. Accordingly, it does not want to pay for the claims of Credit Suisse, which was linked to Greensill loans worth $10 billion.
Understandably, Credit Suisse has a different view and considers the insurance policies valid and the insurers' claims unfounded., It expects it will take up to five years until the matter is resolved.
Court Filing Insights
Tokio Marine and Insurance Australia Group (IAG) were listed as trade credit insurers for funds that had purchased securitized receivables from Greensill. Nearly all of the insurance Greensill had purchased for its promissory bills came from Bond & Credit Company (BCC), a small Australian insurance company sold by IAG to Tokio Marine in 2019.
A «Financial Times» (behind paywall) report reveals the critical relationship between the financier and BCC, which provided $10 billion in default risk coverage for Greensill's supply chain loans, after a look at court filings. The financial risk was borne by the large global insurance and reinsurance companies that backed BCC.
Creating Precedent?
In the Credit Suisse case, loans provided by Greensill Capital were packaged into notes which were then sold to wealthy clients, with insurance intended to protect them from loan defaults.
Credit Suisse told investors in its main Greensill fund that the bills were guaranteed by insurance. At the same time, it warned that payment might not be made in full and on time, according to a document obtained by the Financial Times.
Some observers believe Credit Suisse should not wait for the outcome and should compensate clients now. However, according to the newspaper, regulators could force the bank to hold more capital for potential investor losses if it were to set that precedent.
Australia Case
Greensill creditors are now turning their attention to the proceedings in the Australian Federal Court, where a number of insurance claims by Credit Suisse and other creditors have been consolidated into one case. The proceedings are widely seen as a test case for the billions of dollars in Greensill coverage, with pre-trial hearings scheduled to begin in November.
An important aspect of Australian litigation is the extent to which the insurance covers less straightforward loans, such as future claims or payments for anticipated transactions that have not yet taken place.
«To the extent that the insurance is found to be invalid, this will inevitably lead to even further delay and uncertainty surrounding repayments,» Natasha Harrison, who represents some of the Credit Suisse investors, told the FT.
