Bankers hit with million-pound losses following the collapse into administration late last year of broadcaster Arena Television may need to add 'review underwriting processes' to their 2022 to-do lists.
The facts outlined to date by the court-appointed administrators, Kroll, suggest that due diligence by asset-backed lenders could well do with a root and branch review in the new year.
The administrator’s ‘statement of proposal’ issued to creditors on 21 December 2021, but only published on Companies House on 6 January 2022, found that before its collapse on 10 November 2021, Arena Television (and its parent, Arena Holdings) had racked up almost £300m in loans from 55 lenders secured against thousands of items of broadcasting equipment that simply did not exist.
According to the report: “There is a shortfall of several thousand assets resulting in the liabilities of c.£282m which are not supported by underlying assets as the lenders had been led to believe.”
As part of its investigation the administrators found: “It is apparent that only nine lenders [of the 55] have any verified broadcast assets supporting their finance agreements. These lenders are owned approximately £100m. These lenders will not be repaid in full … The remaining 46 lenders do not have recourse to any assets underlying their agreements.”
Auditors should take some solace that asset valuers were key to first identifying irregularities at Arena.
A week before the directors suddenly closed the business, Hickman Shearer, working on behalf of Arena’s creditors, made an ominous discovery while undertaking an asset verification of the broadcaster’s cameras and lenses.
“While attempting to verify a serial number with the equipment manufacturer, [Hickman Shearer] was advised that no such serial number existed. This caused [Hickman Shearer] the agent to query the concern with the lender. The directors appear to have taken the decision to cease trading shortly thereafter,” Kroll reports.
The "abrupt closure of the business,” the "abscondment of the directors,” the "discovery of materially significant liabilities,” the "shortfall of assets" and the "amount of misinformation apparently provided by the directors to certain creditors,” identified in Kroll's report, has been enough to raise the spectre of foul play, but by whom remains an open question.
The persons of interest to the investigation, unsurprisingly, are Arena’s two directors, Richard Yeowart, founder and owner, and Robert Hopkinson, co-director, who have, according to reports in the Sunday Times, left the UK for France.
The absence of the directors has prompted a worldwide injunction. "The freezing injunction has been served on all known banks holding accounts in the name of the companies and the directors and on various third parties that may have received monies from the directors or companies or may hold assets on their behalf," Kroll says.
Against this backdrop, the administrators have launched a legal claim against Arena’s directors who are being sued for breach of fiduciary duty.
The outside broadcast market
Financial service providers active in the outside broadcast (OB) sector said the challenge was now about not letting this episode tarnish the industry's reputation for meeting their covenants and debt agreements in the eyes of prospective creditors.
Paul Robson, the managing director of entertainment technology finance provider Medialease, says the OB industry's top clients are Sky, Sky Sports, BT Sport, ITV, BBC, Channel 4 and Channel 5 who collectively control a market valued at, at least, £100m a year which feeds an international market valued well in excess of £10bn in contracts held by broadcast rights holders, predominantly for live sporting events and with big live music events representing a smaller but growing segment.
Industry players describe the OB sector as capital-intensive, highly leveraged and characterised by a preference for hire-purchase equipment finance. The sector, which has had it fair share of digital disruption in years past is currently enjoying a period of stability with OB technology, transmission systems and quality control largely standardised across international markets.
Up until Arena's exit from the sector, the UK OB market was made up of three main players with another five following some way behind, says Robson.
French-owned Euro Media Group is the front runner, controlling 40% of the market, and has grown its UK presence recently through a series of acquisitions. In second place is US-owned NEP UK which has also followed an acquisitions-led growth agenda and has about 30% of the market. Leaving British-owned Arena, which had about 25% of the market. The remaining 5% is held by smaller operators, such as Gravity Media, Cloudbass, Timeline Television and Hayfisher Productions, vying for contracts valued at around £1m or less.
A period of market disruption is now expected as OB players compete for Arena’s contracts, and the smaller players will have to snap up Arena’s kit — which the administrators are in the process of selling — to be in with a chance of being able to take on contracts such as football, Top Gear, music events and Crufts 2022.
With Arena out of the picture, major rights holders will want to avoid a two-horse race in the UK OB market, says Medialease’s Robson, “which means smaller providers may do well out of this, but only if they can get financing from specialist brokers and banks who've had their fingers burned massively in this sector.”
Looking ahead, the outside broadcasting market in the UK is undergoing a boom period says Robson, citing the growing interest from Amazon, Netflix, Apple and Disney+, all relatively new to the market themselves and all "wanting a piece of the live sports audience pie."
Fresh air financing
Experts said that while the size of the individual losses don’t threaten the viability of any lenders, questions remain about why and how so few funders performed checks.
Kroll’s schedule of Arena Television’s unsecured creditors reads like a Christmas party invitation list by the Finance & Leasing Association (FLA) and, includes several lessors who have a representative on the FLA board.
The lenders with the biggest losses are HSBC (£29.5m), Lloyds (£12.6m)
Santander (£2.1m), Shawbrook Bank (£34.6m), Lombard (£24.2m), ABN Amro (£22.6m), Close Leasing (£16.2m), Walbrook Asset Finance (£15.9), DLL Leasing (£12m), PEAC (£12m), Investec Asset Finance (£10.8m), AIB Group (£10.5m) and Paragon (£9.6m).
"The scandal is thought to be one of the biggest alleged frauds in the history of asset-based lending," the Sunday Times told its readers in December.
John Cronin, a financial analyst for Goodbody, said: "These losses, to the extent they manifest, will be painful for the lenders’ concerned – but the scale of the losses will not, in overall terms, drive material capital dilution from the perspective of the high street banks and specialist lenders or challengers."
One commercial broker, who spoke on condition of anonymity, described lenders' failure to verify assets as "a little embarrassing for bankers who failed to check collateral," adding that, "banks are under a lot of cost-cutting pressure, so I wouldn't be surprised if short-cuts were taken."
"Smaller lenders, aware that Arena Television was taking loans from the likes of HSBC and Lloyds, may have taken comfort in that fact and skimped on due diligence as a result," the broker said.
Others suggested that underwriters may have been tempted to run a credit score check on the business and its directors and leave it at that.
Being overly reliant on credit referencing could be considered problematic, but when dealing with the small margins involved in lower lease amounts, the pressure to get loans out the door may have seemed a price worth paying for lenders looking to cut corners, industry observers said.
Benjamin Jewell, the managing director of Red Cat Broadcasting, a Northamptonshire-based broadcasting business, suggested that person-to-person relationships may have been important ahead of leasing contracts being signed.
Arena’s Surrey-based chartered accountants for the last 15 years, McKenzies, is also mentioned by Kroll.
Among the “significant number of matters that require investigation” is “the discovery of materially significant liabilities which do not align with the Group’s audited and management accounts,” the administrators said.
According to Arena Holding’s most recent accounts, in 2019, the business posted £33.6m in turnover, with pre-tax profits of £4.2m. Hire purchase contracts falling due within a year came to £11.8m, while HP contracts falling due after that came to £25.2m, totalling £37m.
With Arena's outstanding liabilities believed to be c£282m, the HP contracts cited in the 2019 accounts represent less than one-eighth of the business's true exposure.
McKenzies declined an invitation to comment for this article.
One financial services provider familiar with the Kroll report remarked: "Auditors understand numbers, they don't understand capital assets.”
Tim Chapman, the managing director of asset valuation provider Hickman Shearer, commissioned by Kroll to value Arena’s assets ahead of a sale, says: "The events at Arena demonstrate the need for lenders and auditors to work together. If an auditor is unhappy or unsure about the director’s accounts, they can always reach out to an asset verification specialist to put some systems in place to make sure the assets support the balance sheet.
"Asset verification and adequate management systems of capital assets should be a key aspect of any audit” but unfortunately “asset verification through auditors is not so common, but it should be.”