Bloomberg (Bloomberg) -- Credit Suisse Group AG executives ignored warnings from colleagues about troubled steel tycoon Sanjeev Gupta as they channeled $1.2 billion of client funds to his businesses, according to people familiar with the matter.Bankers in Credit Suisse’s commodity trade-finance unit blacklisted Gupta’s Liberty Commodities Ltd. in 2016 because they suspected some of its deals weren’t legitimate, the people said. When they learned about two years later that the bank was lending to his companies through a suite of investment funds, which eventually grew to $10 billion, they flagged their worries to leaders in compliance and the division that housed the loans, one of the people said.The disclosure that Credit Suisse may have put clients at risk despite internal concerns over Gupta’s businesses adds a new twist to the debacle stemming from the March implosion of Greensill Capital, the finance firm at the center of the three-way relationship.Investigations, LawsuitsThe U.K. Serious Fraud Office is now investigating Gupta’s group of companies for suspected fraud, including in its financing deals with Greensill, according to a May 14 statement. Credit Suisse has sued to force Gupta’s Liberty Commodities into insolvency and has since shut the funds that made the loans and launched an internal investigation. Investors are staring at losses as the bank confronts embarrassing lawsuits.“We are currently focusing our efforts on recovering our investors’ money,” Will Bowen, a spokesman for Credit Suisse in London, said in an emailed statement, adding that the bank’s internal probe will focus on “all of the issues” linked to the funds. “We are committed to learning the lessons and will share the relevant lessons learnt at the appropriate time.”Andrew Mitchell, a spokesman for the Gupta Family Group Alliance, or GFG Alliance, a collective of businesses linked to Gupta including Liberty Commodities, denied any wrongdoing.The Greensill saga represents just one of the two disasters that rocked Credit Suisse in the first half of 2021. Since Greensill began unraveling, the bank has announced a $5.5 billion hit from the blowup at Archegos Capital Management.ApologiesFormer Chairman Urs Rohner apologized to shareholders and his successor, Antonio Horta-Osorio, who arrived at the end of April, has promised a sweeping strategy review.Chief Executive Officer Thomas Gottstein, who was head of the division that oversaw trade finance, wasn’t aware of the internal concerns about Gupta that had prompted the bank to cut him off, according to a person familiar with the matter.Employees at the trade-finance unit, which lends money for the buying and selling of commodities, cut ties with Gupta in 2016 after becoming skeptical toward his Liberty Commodities, the people said. They distrusted the documents the company provided, triggering doubts about its transactions, they said. In one example reported by Bloomberg, the company had presented another bank with what seemed to be duplicate shipping receipts. A spokesman for Gupta has denied any wrongdoing.Banking TiesLiberty Commodities pledged assets to Credit Suisse as security for borrowings in 2013 but by early 2016, all such commitments had been extinguished, indicating that the financing relationship had ceased, U.K. Companies House filings show. And while Gupta’s company listed the Swiss bank as one of its lenders in its 2014 annual report, it didn’t in the following year’s report, which is dated May 2016, according to the filings.Their counterparts at other banks, including Macquarie Group Ltd. and Sberbank PJSC, halted trading with Liberty Commodities around the same time because of similar concerns; Goldman Sachs Group Inc. also stopped in 2016, Bloomberg has reported.Nevertheless, executives at Credit Suisse’s asset-management division -- which creates investment products for clients and charges a fee for overseeing them -- began arranging a suite of funds focused on supply-chain finance in 2017. The entities bought securitized loans packaged by Greensill, a firm created by Australian businessman Lex Greensill. Much of the debts were linked to Gupta’s businesses.WarningsOfficials at the commodity trade-finance unit were concerned when they found out about the funds’ links to Gupta and took their fears to Thomas Grotzer, general counsel for the bank’s Swiss division. They also warned Luc Mathys and Lukas Haas, the bankers who helped oversee the trades at the asset-management unit.Grotzer was promoted last month to interim global head of compliance at Credit Suisse. He didn’t respond to requests for comment. Mathys, head of fixed-income at the asset-management division, and Haas, a portfolio manager, were put on temporary leave in March. Neither responded to requests for comment.The bank pushed ahead with the funds and marketed them to investors as being made up of short-term debt secured on invoices, assets considered so safe that Credit Suisse gave the largest vehicle its lowest rating for risk. Yet part of the loans were linked to mere possible future revenues.Other parts of the bank continued working with Gupta as well. Credit Suisse’s investment bankers were due to lead an initial public offering for Liberty’s U.S. steel arm, which was ultimately pulled, according to a statement from the company. Gupta also announced that the Swiss bank would finance his planned acquisition of Thyssenkrupp AG’s steel unit, which fell apart earlier this year.Credit Suisse has so far recouped about $5.9 billion of the $10 billion in these supply-chain funds, but it remains unclear how much will be returned ultimately to investors. Loans to Gupta’s businesses are among a batch of debts that are the “principal sources of valuation uncertainty,” the bank said earlier this month.Liberty Commodities’s external legal advisors investigated “alleged rumors concerning the paperwork” it used in 2019, according to Mitchell, the spokesman for GFG Alliance. They found no evidence to substantiate the rumors, nor was the company “ever subject to further complaints or proceedings,” he said.“LCL has ongoing banking relationships with separate financial institutions,” Mitchell said, referring to Liberty Commodities. “The trade-finance market has been hugely challenging for all but the very largest commodities traders in recent years. Nevertheless, no financial institution has been left out of pocket as a result of lending money to LCL. On the contrary, they have received substantial commercial returns.”More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.<doc-sep>Text size In the wake of Uber Technologies ’ poor initial public offering, investors are starting to wonder whether ride-sharing is an attractive business model. Uber shares (ticker: UBER) are up 59 cents Tuesday to $37.69 after falling sharply Friday and Monday in the wake of its IPO. The shares are down 16% from the IPO price of $45. Lyft stock (LYFT) is up $2.94 to $51.09 Tuesday but is still 28% below its March IPO price of $72. Investors are concerned that the two levers that Uber and Lyft can pull to boost profits—cutting payments to drivers and raising prices for consumers—could hurt growth by making it even harder to attract and retain drivers and turning off consumers, wrote Davidson analyst Tom White in a client note. This marks a shift from the pre-IPO mind-set, when investors focused more on the huge addressable market for both companies and less on profitability questions. While Uber and Lyft executives have said they plan to continue investing for the long term, the companies remain deeply unprofitable. Uber lost about $1 billion in the first quarter, and Lyft has projected a loss of around $1.1 billion this year on a smaller revenue base than Uber. Barron’s has been skeptical of both Uber and Lyft, given their long road to profitability. “Over the past few days, we’ve noticed significantly more interest/inquiries from investors about the unit economics for ridesharing and questions about whether it’s even a good business model. At a high-level, we believe the market is wrestling to understand the interplay between 1) the key levers to achieve profitability in ridesharing, and 2) whether pulling those levers might restrict the addressable market opportunity,” White wrote. “For example, of the myriad ways that UBER/LYFT can improve their margins, raising prices for consumers and/or significantly reducing payouts to Drivers are obvious ones. If one or both of these levers are ‘pulled,’ would the size of UBER/LYFT’s addressable market opportunity be restricted/reduced as a result?” Editor's Choice White has a Buy rating on Lyft with a $72 price target and a Neutral rating on Uber with a $53 price target. He noted that Uber is valued at about 3.7 times estimated 2020 sales, and Lyft at 2.5 times projected 2020 sales, based on their enterprise values (market values less net cash). Most investors believe that Uber deserves a premium to Lyft because of its larger size, global scale, stakes in overseas ride-hailing companies, and its other businesses like Uber Eats. White, however, said he isn’t convinced that Uber deserves a large premium given its “sharply slowing revenue growth, share losses, more impaired brand, and deteriorating Core Platform margin trends (and by contrast, LYFT’s more resilient revenue growth rate, steady share gains vs. UBER, healthier brand, and improving profitability trends).” Uber’s revenue growth slowed to 20% in the first quarter from 69% in the March 2018 quarter. Lyft’s sales were up 95% in the first quarter. Write to Andrew Bary at andrew.bary@barrons.com<doc-sep>Laura Buckman/Reuters Lyft hit a new low Monday after shares of rival Uber had an underwhelming stock-market debut on Friday. Lyft's stock is down nearly 34% since its initial public offering in late March as investors grapple with the company's uncertain path to profitability and the threat Uber poses. Watch Lyft trade live. Lyft on Monday continued its rocky run as a public company, with shares plunging to a new low. The stock fell by as much as 6.5%, to close at $47.78, as the broader stock market came under intense pressure and rival Uber made its public debut the session prior. With Monday's decline, Lyft shares are now down 34% — or about $12.5 billion in market value — since their initial public offering in late March. Its first month on the stock market was the second-worst for a large US-listed IPO on record, according to a Dealogic analysis. Only Facebook's 2012 debut was worse. A few things are weighing on Lyft. The broader market is in the midst of a particularly volatile period as the US and China have escalated their long-standing trade war, creating an inopportune environment for any newly public company. The trade spat between the world's two biggest economies is latest phase was taken to new heights on Monday after China said it would raise tariffs on thousands of American products. While major US markets are still within striking distance of their all-time highs, they've tumbled 3% over the past week. Read more: Stocks are plunging after China retaliates with duties on $60 billion of US goods At the same time, Lyft is one of many money-losing IPOs to hit the market this year, logging billions of dollars of losses in the last year. While it's hardly unique for a young technology company to lose money while chasing growth, analysts have still pointed to Lyft's uncertain path to profitability as a reason for caution. Lyft recorded a $1.1 billion loss in its first quarterly report as a public company, released last week. Meanwhile, Uber has been a major factor in evaluating Lyft's performance. Analysts are concerned about Uber's dominance in the global ride-hailing market and its sheer size as a competitive threat. While the bears are laser-focused on Lyft's number-two position in the ride-hailing market and its eye-popping losses, the bulls are trying to craft a long-term narrative. "Long term, we still see shared transportation as a market with a long runway for secular growth, potentially more rational industry competitive dynamics as maturity approaches & broader positive impacts on society," Eric Sheridan, an analyst at UBS, wrote in a note to clients. Read related coverage from Markets Insider and Business Insider: Uber is tanking after logging the biggest first-day dollar loss in US IPO history Stalled out: Why the rush of IPOs from big, unprofitable companies like Uber and Lyft could throw the entire market off track 3 reasons why Uber had such a 'weird' and terrible IPO, according to a portfolio manager who wouldn't buy the stock Markets Insider NOW WATCH: Warren Buffett, the third-richest person in the world, is also one of the most frugal billionaires. Here's how he makes and spends his fortune.<doc-sep>Uber Shareholders May Be Shorting Lyft as a Hedge By John Jannarone Many Uber shareholders have been forbidden from selling shares until six months after the IPO. That restriction may have given them an extra reason to bet against rival rideshare operator Lyft. Once Lyft shares began their precipitous slide, it was clear to many Uber investors that their stock was in danger. After all, Lyft had priced at a healthy multiple around 5.6 times 2019 estimated sales, at least a turn above Uber. But without that valuation cushion, loss-making Uber became trickier to value. That caused problems even before the Uber IPO came together. While the company technically sold about 11% of the company in the IPO, there were plenty of sellers in the secondary market shopping their shares around in the weeks before. Accounting for such share sales, there may have been 20% to 25% of the company for sale around the time of the IPO, according to IFR. Once the IPO happened, others investors may have found creative ways to reduce exposure without violating the lockup rules. One such strategy of dubious legality is to place shares in an LLC and sell an interest in it to others. But there was another hedge hiding in plain sight: Betting against Lyft. “There may be an impact from shareholders subject to lockup who may see the competing ride hailing firm as the best available hedge,” said Sam Pierson, Equities Analyst at IHS Markit. “The shares in float for both firms are relatively small compared with shares outstanding, so even a small amount of hedging could be significant as a percentage of float.” There has been an extraordinary increase in Lyft short sales that coincided with its dramatic share-price decline. Some 66% of the available float of Lyft share has been sold short, Mr. Pierson said. Of course, the effect could work in both directions. Locked-up Lyft shareholders may also want to short Uber as a hedge. But as Mr. Pierson points out, the float of Uber shares is about four times as large as the Lyft float. That suggests the impact on Lyft shares would be far greater. Story continues Indeed, only about 7% of the Lyft float has been shorted. (Mr. Pierson said that data is preliminary so soon after an IPO and the true figure may be higher, though not dramatically). One risk is that a decline in both stocks creates a vicious cycle as investors grow worried about protecting profits from shares they bought months or years ago. “If the shares of both firms continue to sell off the opportunity to hedge may become more attractive, which could add to selling pressure,” Mr. Pierson said. “On the flip side those shorts may also be less sensitive to increases in share price, provided the share prices demonstrate significant positive correlation.” One mitigating factor is that Lyft has become extraordinarily expensive to short. There are so few shares available that a new short seller must pay between 45% and 60% annually to borrow the stock. But with the Lyft lockup expiring in just a few months, the scarcity issue will soon disappear. Lyft investors, now more than ever, should be sure to look both ways. Contact: John Jannarone, Editor-in-Chief www.IPO-Edge.com Editor@IPO-Edge.com Twitter: @IPOEdge Instagram: @IPOEdge<doc-sep>
Uber Technologies Inc., like rival Lyft Inc., does not have a road to profitability unless it does one of two things: Get rid of drivers or raise prices. Expect the ride-hailing giants to try to do both, now that Uber UBER, +1.31% and Lyft LYFT, +4.09% are public companies that will have to face Wall Street pressure every three months. But considering how long it may be before autonomous robotaxis are prevalent on our streets, price increases are much more likely, and may be largely hidden by the companies. Uber, which priced its shares Thursday night and slumped in its trading debut Friday, was the most anticipated Silicon Valley IPO since Facebook. And while many investors have been impressed by the sheer scale of its business compared to the size of rival Lyft’s — which is mostly in the U.S. and not yet as diversified — Uber’s losses are just as stunning. In 2018, Uber reported an operating loss of $3 billion on revenue of $11.3 billion, and its accumulated deficit reached nearly $8 billion at the end of last year. Uber said in its “roadshow” presentation that it expects Ebitda losses in 2019 to increase, as it continues to invest. Both Uber and Lyft have been subsidized over the past decade and seven years, respectively, by venture capitalists and other private investors who have been willing to bet on the ride-hailing upstarts, and whose funding allowed the experiments to grow with low fares. But as public companies, that stage of their life ends now. “Right now they are both in the mode of ‘let’s capture market share,’ and the bottom line is less important than capturing revenue and market-share growth, but once you become a public company and you have to release your earnings every quarter, people will be very closely monitoring your earnings,” said Reena Aggarwal, a professor of finance and director of the Center for Financial Markets and Policy at Georgetown’s McDonough School of Business. “There is going to be a lot of focus on that. They will have to raise prices, because of the pressures.” Just one example of how this has played out in tech can be seen by looking at streaming media companies such as Netflix Inc. NFLX, +0.20% NFLX, +0.20% . While Netflix was in the DVD rental business, it offered its customers the ability to stream video for free, along with their DVD subscriptions, as an experiment. As streaming started to take hold, Netflix began to charge for it, first with its ill-fated Qwikster effort, but then by separating the streaming business from DVD rentals. One of the biggest pressures is Uber’s relationships with its drivers, who went on strike worldwide Wednesday to protest the company’s business model ahead of its IPO. The drivers argue that Uber’s business model enriches company executives at the expense of its low-paid drivers, who are contractors, and not full-time employees with benefits (this issue is at the heart of several lawsuits that seek to get drivers classified as employees). Uber offers incentives to drivers to join, hurting its bottom line even further, and rider discounts. In the company’s S1, it said it increased driver incentives and promotions in the first quarter to maintain its competitive market position, and noted that it expects its driver relations to get worse. “As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase,” the company said. It also noted that as it continues to invest in self-driving cars, “it may add to driver dissatisfaction over time, as it may reduce the need for drivers.” “Getting profitable by squeezing down costs is going to create even further problems, with the high turnover rate with drivers and challenge the new drivers so they can expand,” said Larry Mishel, distinguished fellow at the Economic Policy Institute in Washington. “There are huge contradictions at the heart of their business model.” Last year, Mishel worked on a study of Uber drivers and concluded that their W-2 equivalent hourly wage is less than what 90% of U.S. workers earn. “Our results indicate that Uber drivers earn low wages and compensation and the total hours and compensation in the gig economy represent a very small share of total hours and compensation in the overall economy,” Mishel’s study said.