In July 2020, negative publicity had forced Credit Suisse to launch its Greensill investigation – and it seemed like a good time to publish some findings of our own. My colleague Julie Steinberg and I wrote a story in The Wall Street Journal, uncovering details of some of the companies that were borrowing money from the funds – the ‘obligors’. Collectively they had received billions of dollars of loans, all money that came from Credit Suisse’s own clients.
We focused on companies whose businesses were inherently odd, or that had troubled financial histories or a poor track record when it came to repaying debts. There were quite a few to choose from.
But one of the biggest obligors was a company called Bluestone Resources Inc. It had received about $40 million in financing from one of the Credit Suisse funds, and we knew from some other sourcing that it was one of Greensill’s biggest clients in terms of the amount of revenue it generated.
At first, it wasn’t easy to track down Bluestone. There are several companies named Bluestone, or that have a similar name. Any Credit Suisse investor tracking the obligors could easily have looked at the wrong company. We figured out the one we wanted was a coal-mining business based in West Virginia.
Bluestone Resources made for an interesting, oddball case study for our article – later, we realized just how important it was to the entire Greensill story, as loans to Bluestone ballooned and Credit Suisse’s ability to recover the debts foundered.
The coal-mining company is owned by one of the most colourful politicians and businessmen in the US. Jim Justice, the billionaire governor of West Virginia, is six feet seven inches tall, an avid basketball fan, and an imposing and controversial figure.
Justice grew up on coal. His father had made a small fortune in the coal industry, and Justice built an empire off it. Over several decades, he bought and sold hundreds of farming, timber and coal companies. In the 1970s, he ran Justice Family Farms, which grew soybeans, corn and wheat. He was US national corn-growing champion seven times, according to CNN. In 2008 and 2009, he negotiated to sell off the coal mines to various buyers, including a Russian-owned metals and mining company called Mechel. The Russians reportedly agreed to pay about $4 billion for the mines, which were collectively known as Bluestone. When the financial crisis hit, the deal was restructured and Mechel paid only about a tenth of that price. Even then, the acquisition didn’t work out. The owners of Mechel had loaded up with too much debt, and they were under some political pressure, facing stinging criticism at one point from Vladimir Putin for exporting raw materials too cheaply.
In 2015, when coal prices were hitting rock bottom, the Justice family bought Bluestone back for $5 million. They had acquired a substantial operation, a small but genuine player in the metallurgical coal sector. The Justice family’s coal interests mined more than a million tons of coal in 2018, most of it metallurgical coal used in steelmaking. It sounds like a lot, though the largest metallurgical coal miners in the US produced about ten times as much.
Back in 2009, Justice had also acquired the Greenbrier, a sprawling hundred-year-old resort hotel in the Allegheny Mountains, renowned for its golf course and Cold War bunker, and because it has hosted dozens of illustrious guests including prime ministers and presidents. The Greenbrier was bankrupt, and the Justice family picked it up for just $20 million. It was a typically opportunistic deal. The resort is likely valued at many multiples of what Justice paid for it, although perhaps not the $1 billion that he has claimed.
In 2016, Justice ran for governor of West Virginia – one of the poorest states in the US. He was a controversial politician and a frequent pundit on cable news. Although Justice was a registered Republican, he ran as a Democrat in the blue-collar state.
After he won, Justice switched camps again, back to the Republicans, a move he announced at a rally with President Donald Trump. It was a strange turn of affairs – in a period of major electoral surprises, the political news publication Politico asked, ‘Is West Virginia Holding America’s Weirdest Election?’
Justice had also become known for something else: not paying his debts. In May 2020, the US investigative journalism outlet ProPublica published an investigation into the Justice family’s businesses. The investigation found that Justice’s companies had been involved in more than 600 lawsuits in the past thirty years, including suits filed by the company’s workers, business partners – and suppliers. In most cases, the plaintiffs alleged that Justice’s companies hadn’t paid their debts. In a story accompanied by a photo of Justice in full camouflaged hunting gear, carrying a rifle, the magazine Forbes called Justice ‘The Deadbeat Billionaire’ and documented tens of millions of dollars in unpaid bills.
In other words, Justice made for a strange client for an investment fund that makes loans to supposedly super-safe, low-risk borrowers.
But here’s how it happened. Bluestone wasn’t the bargain its $5 million price tag suggested. The acquisition of his old business also saddled Justice with about $300 million in environmental and legal liabilities. Justice said Mechel had mismanaged the company, ‘burdening it with substantial reclamation, union and trade obligations.’ The Justice family – Jim and his son James ‘Jay’ Justice III – set about restructuring Bluestone’s finances and operations. The long-term makeover would not come cheap. Step forward Greensill Capital.
Jim Justice had been introduced to Roland Hartley-Urquhart through a mutual acquaintance. This was Roland’s world. The Greenbrier was his comfort zone. He became a confidant of Jim Justice, emailing regularly and talking frequently in person or on the phone. And he sold Justice a bunch of Greensill debt.
Initially, Bluestone signed up to a small supply chain finance and receivables programme – this is what we wrote about in The Wall Street Journal in the summer of 2020. We had noticed something odd about the loan. In that first round of financing, Bluestone repaid Greensill with a combination of cash and $25 million in equity warrants. This was strange. Typically, SCF loans are paid back with cash alone. Typically, any kind of loan is paid back with cash. A lender would only expect payment in any other way as a last resort. Bluestone was paying its loan back with a financial instrument that gave Greensill the right to own a few Bluestone shares. It certainly didn’t help counter the view that lending money to a Justice business was risky.
It was even more eye-opening in the context of Greensill’s business. The $25 million was equivalent to more than half of Greensill’s entire profits for the whole of 2018. Depending on what you thought the shares were worth, their valuation could have a huge impact on Greensill’s profitability.
Accepting payment of the loan in shares rather than cash suggested Bluestone had Greensill over a barrel. You’d only accept shares if there was no cash offered.
When we wrote the story, Bluestone’s lawyers told us that the company had been working with Greensill to improve its working capital. The lawyer also said that the equity warrants were ‘very soon after redeemed fully in cash’ – though it wasn’t exactly clear what that meant. (Later, after Greensill collapsed, the administrators Grant Thornton issued an update on their work in October 2021. The update said that Greensill held an equity warrant related to a US mining business that had been booked at a value of $50 million. The administrators said it was unclear how much of that could be recovered. It is also unclear whether this was a new warrant, different to the one we wrote about in 2020, but it almost certainly relates to Bluestone.)
The strange deal we wrote about had been just the opening act. Bluestone was quickly becoming a significant Greensill client. Though Roland was the key contact, Lex himself flew down to West Virginia to meet with Greensill’s increasingly important business partners. The amounts Greensill loaned to the coal company grew rapidly too. And Greensill was becoming increasingly dependent on Bluestone revenue. Within a few months, Bluestone was responsible for a third of Greensill’s revenue, more than any other Greensill client in 2018, including all of Sanjeev Gupta’s companies put together.
Here’s how the loans were structured. The Greensill and Bluestone executives discussed an ‘enterprise financing’ agreement that would fund the comprehensive rebuilding of Bluestone. That process would take several years to bear fruit, and the financing from Greensill would need to be preserved for all of it. The Justice family understood the loans were long term and didn’t have to be paid back for several years. Within Greensill, the Bluestone loans were also counted as ‘committed facilities’ that were longer term too. An extra level of security for Greensill was that the Justice family personally guaranteed their side of the agreement – they would be personally on the hook if Bluestone did not pay up.
Greensill and Bluestone also agreed that all the loans would be backed by receivables – amounts owed to Bluestone for coal it sold. The agreement stretched the limits of conventional financing. Bluestone could also borrow from Greensill based on ‘prospective receivables’ – amounts attributed to potential buyers of Bluestone coal in the future. Greensill provided Bluestone with a list of potential buyers and put a number alongside their name for potential revenue. Greensill was no longer financing actual transactions, but possible transactions that might or might not take place sometime into the future. They were literally making up the numbers.
All of this was financed out of the Credit Suisse supply chain funds, which were supposed to be making short-term SCF loans. Bluestone and the Justice family later claimed they didn’t know about Credit Suisse’s role until Greensill collapsed. In any case, Greensill managed the short-term/long-term issue by making a series of shorter-term loans to Bluestone, which were continuously rolled over on maturity.
A lawsuit Bluestone filed against Greensill in early 2021 included an illustration to show how this worked:
‘By way of example, on January 4th, 2019, $15 million of Prospective Receivables were scheduled to ‘mature’ or be rolled over. On that day, Greensill Capital was to ‘purchase’ new Prospective Receivables in the amount of $15 million from Bluestone by wiring to Bluestone a discounted amount of $14,543,186 (with the ‘discount’ corresponding to the interest to be paid from the date of the new purchase until the next roll date). Bluestone then wired to Greensill Capital the $14,543,186 just received from Greensill Capital plus the difference between such amount and the $15 million to be repaid ($456,814 in this instance) back to Greensill Capital. The net result of that exchange was Bluestone’s payment to Greensill Capital of only the $456,814 in interest.’
The result of this was that Bluestone didn’t have to repay its loan, or even pay the interest on the loan – those payments were coming directly out of the funds extended from Credit Suisse to Bluestone via Greensill.
In summer 2020, this remarkable process was streamlined even further. Greensill modified the system, so that Bluestone no longer rolled the loan over. Instead, the coal-mining company just paid Greensill the net amount of fees owed. This became known as a ‘cashless roll’.
Around the same time, Greensill had also agreed to extend the life of its commitment to Bluestone. The initial four- to five-year lending arrangement was upped to six to eight years. In September, Justice met Roland at his home in Westhampton, a wealthy enclave of Long Island. Greensill wanted to do even more business with Bluestone, Roland said. We will continue rolling Bluestone’s existing loan facilities, he assured him. You’re a valued partner, and Greensill as a firm was a believer in Bluestone and its management.
By 2020, Lex had another plan. He had begun to connect the dots between his two biggest clients – Sanjeev Gupta and Jim Justice.
If Bluestone had a steady stream of sales for its metallurgical coal, then Greensill could provide even more financing. And if GFG had a reliable supplier of coal, then that could be financed too. By getting Bluestone and GFG to work together, Greensill would have plenty of cash flows against which he could make loans.
Roland made the case to Bluestone. A first delivery of coal from Bluestone to GFG followed in mid-2020. But when the payment for that shipment fell due in December 2020, GFG failed to pay. Another shipment of coal was due the same month. Justice put a block on it.
Between 2018 and 2021, Greensill loaned Bluestone $850 million, and Bluestone paid $108 million back to Greensill in the form of fees. Greensill also received warrants to purchase a stake in Bluestone that was worth another $100 million. But the relationship was increasingly strained.