Biggest alleged frauds in the history of asset-based lending?
In the “ARENA” scandal, the most significant [alleged] fraud in the history of asset-based lending.
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Glastonbury broadcaster’s collapse leaves experts up in arms over lack of oversight
Arena, which worked at events such as Glastonbury, has outstanding charges in favour of Clydesdale Bank and NatWest
As details of an alleged fraud at Arena Television emerged last week, some onlookers expressed shock, both at the scale of the supposed scam at the outdoor broadcast company and the number of banks and non-bank credit providers caught up in it.
The business, which had turnover of £30 million a year and worked on events such as:
- The Glastonbury music festival,
- Six Nations’ rugby and
- The Euro 2020 football championship in the summer,
Is thought to have borrowed £280 million from at least 20 lenders, with administrators understood to have been called in when an auditor acting for one of Arena TV’s lenders tried to verify serial numbers for company-owned equipment used as security for loans.
When the auditor called the equipment supplier, they were told that the numbers did not exist.
Arena has outstanding charges in favour of Clydesdale Bank and NatWest, while its holding company, also bust, has outstanding charges in favour of Close Invoice Finance and Barclays.
Other high street banks and non-bank lenders are caught up in the collapse, including HSBC, Shawbrook, Santander and United Trust.
It is also embarrassing for the government.
The Times revealed last week that millions of pounds of loans to the company comprised emergency pandemic credit underwritten by the state. The Sunday Times reported that furloughed staff at Arena had complained of being told to return to work at the business while being paid by the government-backed wages scheme.
The scandal is thought to be one of the biggest alleged frauds in the history of asset-based lending.
While casual observers were surprised at:
- How what is ultimately a small business appeared to have received hundreds of millions in credit from such an array of lenders, some in the leasing and asset-based lending industries said they were surprised only that something like this had not happened before.
Nic Conner, a former finance broker, said:
- “With asset finance, the lender doesn’t look at the company at all.
- All they care about is the asset and its residual value. Some lenders, the good ones, will want a site visit and even have their own serial number welded on; but so many will just ask for a photo.”
A senior finance executive in the industry who has run large asset finance loan books said that
- He had been expecting a large fraud.
The executive, who asked not to be named, claimed that:
- “Standards slipped” in the sector as it became more competitive, with more non-bank credit providers and smaller banks entering the market, and that several lenders had watered down procedures that normally would involve physically checking the equipment against which finance has been provided.
- “Many don’t do inspections and, if they did, they did it on a retrospective basis after the loans were drawn down,” he said.
- “This opens the door for fraud. There will be more cases like this, for sure.
- “It is a cost of having a branchless, remote offering. When I was running [an asset-based lender], we would insist on asset inspections on all higher-value items and/or where the borrower had a reasonable credit line comprising lots of lower-value items.”
- Staff would visit the customer’s site and inspect the asset and the equipment supplier’s invoice on delivery of the kit borrowed against.
- “This meant we knew the asset actually existed and the invoice had the [lender’s] name on it, which helps prevent a borrower taking out lots of loans on the same asset.”
Lending against kit plays a big role in business finance. There are two ways of doing so:
- Leasing, in which equipment effectively is owned by the bank and leased to the business; and
- Asset-based lending, where equipment is pledged as security but is owned by the customer.
Arena appears to have been doing both.
There was £27 billion of new leasing finance in 2020, £16 billion of which went to small and mid-sized companies. Invoice and asset-based lenders advance £22 billion to 42,000 UK businesses.
The former finance executive said that as the competition had increased, some smaller lenders might be less capable of absorbing losses from big frauds.
- “In their drive to grow their books, they got aggressive on price and won’t have adequately factored this cost into their lending margins,” he said.
Adrian Walsh, chief executive of CheckVentory, a business that digitally validates assets before, during and after the underwriting process, said:
- “The asset finance market has been fairly benign in terms of risk for several years and that may have led to complacency.
- We find it fairly easy to get in front of lenders, as they have an interest in this area but most stick with their traditional methodologies.”
Interest may soon increase. Will Wright, head of restructuring at Interpath Advisory, told The Sunday Times:
- “This is pretty unprecedented stuff and the finance industry will be looking hard for lessons to learn.”
As well as physical checks, increased vigilance on data could help lenders to spot future scams. Katrin Herrling, chief executive of Funding Xchange, a small company lending marketplace, said that the:
- “Data is already out there” to help lenders to spot potential frauds, but added that the challenge for organisations was whether they were set up to act on red flags.
Ben Sher, leader of Funding Xchange’s technology division, said:
- “There is an awful lot of data. The difficult part is creating actionable insights, which requires recognising patterns amongst the noise.”
Funding Xchange hopes to convince lenders of the power of data to make better decisions. It has launched a
- “Portfolio monitoring” tool that tracks thousands of data points to establish patterns, such as a jump in lending contracts signed by a borrower.
Andrew Holgate, a commercial finance expert and chief executive at Equitivo, a financial technology adviser, said that:
- Lenders would face awkward questions over whether they had verified assets and checked that they did not have debts linked with them.
- “It seems some basic fundamentals were missed,” he said, adding that although there may be increased scrutiny of borrowers, “banks lose money all the time. This is just larger than normal.”