Twitter: Unanswered Questions & Logical Conclusions (?)

SAM's Consultant Logician Philip Francis Queeg

 

 

The press has reported that someone who is in an excellent position to know has stated that a replacement CEO for Twitter would have to be "foolish".  

I believe the exact words were "foolish enough to take the position" or some variant.

However, there was no reported assessment about the state of mind of the recent purchaser of Twitter who it would seem to me--and perhaps to you--would have a lot more at stake than a "hired hand".

Does logic, perhaps geometric logic, enable us to draw a reasonable conclusion?

As a side note, most successful businessmen and their bankers report that rigorous up front due diligence generally--but not always--leads to better decisions than that conducted after the closing.

 

The New Era of Due Diligence Likely to be Pretty Much Like the Old

 

Latest Technology, But Still the Same Spots

Over at Institutional Investor on 27 May Nathan Yates wrote how "The Old Era of Due Diligence Is Over. Here’s What the Post-Pandemic Future Might Hold"

A very good article.

Lots of sensible points about why in-person due diligence is better than that conducted over Zoom.

What caught my eye was the comment of one “expert” he interviewed.

Clear, frequent, and honest communication among stakeholders is especially important during remote due diligence and will stay in place post-pandemic.

Three reactions.

As an introduction, I presume that there was some context that is now missing around that quote because it doesn’t make much sense.

It seems to me that “clear, frequent, and honest communication” would be especially important no matter how the due diligence was conducted.

One could also read the phrase “will stay in place” to suggest that it did not widely exist pre-pandemic. 

That’s probably not an unwarranted assumption.  That is, that it did not exist pre-pandemic.

The unwarranted "bits" are that (a)  it currently exists and (b) will so in the future. 

There are many fund managers and investment advisors who come up short in the "clear" and "honest" categories no matter how they pitch prospective and existing clients.

Can we really expect those leopards to change their spots just because they're now using new technology?

Does Zoom have an honesty enhancing effect?

Caveat emptor and some prophylactic measures are probably better steps than hope for change.   

More on that topic to come in a subsequent post on games fund managers play.

Freeport LNG Marketing LLC Financing: Did US Eximbank and PEFCO Flub Due Diligence on Greensill?

There was an article in the FT today calling into question US Eximbank's and PEFCO's due diligence in connection with an approval of a supplier credit transaction for Freeport LNG involving Greensill as lender.

The timing raises questions about the due diligence that the Exim Bank and Pefco, its funding partner on the deal, conducted on Greensill, whose German banking subsidiary was under investigation by regulators last year.

I think the questions raised can be answered: no.

Summary:

Eximbank and PEFCO have no financial exposure (credit risk) to Greensill in this transaction. As such, their due diligence was appropriate at the time it was conducted.

Eximbank’s primary focus in this transaction and others is (a) the promotion of US exports and (b) creation of US jobs.

Or in other words, Eximbank's customer here is Freeport.  Greensill is a service provider.

At this point, the ability of Greensill to fulfill its obligations under the transaction are in question. Eximbank is no doubt looking for a replacement.

That raises two issues: (a) finding an FI able to handle the supply chain invoice processing and (b) one willing to take risk (10%) on Freeport.

Detailed Argument

Now to the details that support those contentions.

At its 29 September 2020 Board of Directors Meeting ,US Eximbank approved a 90% guarantee under its Supply Chain Finance Program for transactions involving Freeport LNG Marketing LLC as the obligor. (Eximbank reference AP089370XX).

Note that date. Eximbank issued its commitment in September 2020.

At this point concrete news about Greensill’s situation was much different than in January 2021. So if there is an issue with Eximbank’s due diligence, it has to be focused on the period before 29 September 2020.

Eximbank lending is highly rules based. Procedures for approval are more complex and thus more time consuming than in a typical financial institution.

The board approval package would have been prepared, reviewed, and finalized well before the board meeting. 

You can well expect that as well preparation and approval of transaction documentation is similar. That explains the time taken to finalization.

Some key points about this transaction.

1. Freeport is the obligor on the loan. Eximbank's credit risk lies squarely here.

2. US Eximbank guarantees to pay the lender 90% of principal if Freeport doesn’t pay.

3. The lender bears the risk of the unguaranteed 10%.

4. US Eximbank is providing a guarantee not funding.

5. If the lender does not or can not lend, then Eximbank has no exposure to either the obligor (in this case Freeport) or any obligation to the lender (Greensill).

6. Eximbank reviews the documentation for each transaction under an approval for compliance with (a) the terms and conditions of its approval and (b) US content requirements. Then and only then it issues a “guarantee” for that transaction.

Clearly, then the primary focus of Eximbank’s due diligence would be on Freeport.

Due diligence on the lender would focus on its ability to handle a supply chain transaction both in terms of systems and experience as well as no "blocking" issues.  

Those would include legal prohibitions, e.g., US sanctions, etc.

Greensill passed those tests at the time of due diligence.

If the bar were set to exclude those FIs that engaged in reckless banking practices (imprudent lending, over concentration of risks, market manipulation) or illegal behaviour, then the set of "acceptable" banks for US Eximbank would appear to be fairly limited.  And exclude a large number of the G-SIBs.  

PEFCO is a specialist private sector owned lender that provides primary and secondary funding for loans guaranteed by US Eximbank. It also does a very minuscule business in other sovereign guaranteed loans. Roughly 1.4% of total loans.

Eximbank exercises “oversight” on PEFCO’s operations beyond that it does with other financial institutions to which it may give a guarantee.

Given the nature of its business, PEFCO is able to access both fixed and floating rate funding at very attractive rates.

In the Freeport transaction, PEFCO reportedly acquired a 100% “participation interest” in the Eximbank guaranteed portion of the Freeport loan.

That would mean that Greensill remained at risk of non payment on the unguaranteed 10%.

For the same reasons as above, PEFCO has no credit risk exposure to Greensill.

Given the Eximbank guarantee, it has none to Freeport.

Its decision to enter the transaction was almost certainly based on the US Eximbank guarantee.

PEFCO’s s role in the transaction would be to provide competitively priced funding in the form of a lower discount rate than Greensill could obtain in the market

That is, when Greensill presented PEFCO an Eximbank approved (guaranteed) supplier invoice, it would buy the invoice from Greensill at an agreed discount rate.

To reiterate: Eximbank's guarantee is evidenced by its issuance of a document after it examines the invoice and any supporting documents to ensure that (a) US content and other requirements have been met and (b) the transaction complies with the conditions of that approval.

PEFCO would make sure to confirm the guarantee.

Greenill’s compensation would be potentially a mixture of (a) the difference between its discount rate and PEFCO’s (b) any upfront fee it charged Freeport, and (c) any fees it charges Freeport for the processing of the supplier invoices.

What is to be done now?

Now there is a question as to what Eximbank “should” do now that Greensill has crashed or when the probability of its crash became apparent.

As noted above, Eximbank’s mission is to promote US exports and US jobs. 

So it would be rather reluctant to throw the Freeport "baby" (its customer) out with the Greensill "bathwater" (a service provider).  

As a general rule, Eximbank tends to very "high church" in honoring commitments/approvals it has given.  

Part of this is institutionally motivated to maintain market confidence in its "word".  

Part is concern that its customer may have made financial commitments and would therefore incur a loss, if Eximbank were to walk away. 

Eximbank and Freeport are no doubt looking for a replacement institution with the capacity to process supply chain finance.

And the willingness to hold 10% of the risk of any outstandings within the US$ 50 million.  

Two other key considerations for Eximbank.

The SCF program has been in existence for a few years. Frankly, usage has been disappointing. 

Eximbank has also domestic political considerations given its recent close encounter with the grim reaper.