feature Grim tales of the leasing trade
KBC Lease UK, Total Asset Finance, H2O i3 Group and Fibrecity seem intertwined in a major debacle like the bundles of the spaghetti-like cables that Fibrecity dealt in
T
he UK Serious Fraud Office (“SFO”) has reportedly opened a misconduct investigation into Total Asset Finance (“TAF”). Until recently TAF had been the principal funder of H2O Networks, which at the time of the problems late last year was still part of the i3 Group (“Fibrecity”), with related loans worth more than £91 million attached. According to the website BusinessDesk , this cash was being used by Fibrecity and H2O to fund the rollout of its super-fast 100Mbps Fibre-to-the-Home broadband ISP services in two towns, Bournemouth and Dundee.
Sadly the above project suddenly and controversially ground to a halt at around the same time as Belgian bank KBC launched an investigation into the contracts held between TAF and H20.
Bournemouth Borough Council called a meeting with Fibrecity to discuss serious concerns surrounding their work and the damage caused to the town’s infrastructure. Many of the problems stemmed from dissatisfaction with the quality of their road works, which caused disruption and a great deal of annoyance to affected residents. The firm originally set out to run its fibre optic cables through underground sewers, although a failure to use this method ultimately forced them down the costly and highly disruptive path of having to dig up roads. Many believe that the i3 Group's attempt to cut costs went too far and ultimately led to some seriously substandard work. Soon after October 2010 the administrator successfully obtained an injunction to freeze the assets (some £24 million) of TAF and its Director, Steve Dartnell. Dartnell had also been a Non-Executive Director of i3 Group until November 2010 (Companies House records) when he resigned. However Dartnell himself claims that he actually resigned in June 2010. More than £91 million of funding from Total Asset Finance had been used by i3 Group who owned H2O networks along with Fibrecity Holdings. The i3 Group has subsequently sold off its UK subsidiaries, which include the Fibrecity project, H2O Networks, Opencity Media, and Wireless Network Systems. The buyer, similarly named City Fibre Holdings, is a consortium led by new CEO Greg Mesch, i3’s own former President and COO.
The CEO of City Fibre Holdings, Greg Mesch, reportedly said, “City Fibre Holdings and its management team are not the subject of any investigation. The company is focused entirely on reorganising the companies and the financial structures that it has inherited. This critical restructuring of these newly purchased businesses will ensure that they can continue to be leaders in fibre-based next generation access networks.” Such a blase approach to the loss of such a large amount of money put in the hands of relatively small companies based on paperwork from who knows where, must make the blood of those in the leasing industry freeze, or boil, or possibly both
March 2011 ■
www.leasingworld.co.uk
simultaneously.The administrators investigating TAF's collapse are currently looking at the conduct of its directors and related transactions. They’re apparently also talking with City Fibre Holdings about settlement of the money owed to TAF, albeit allegedly not as part of the primary investigation. City Fibre Holdings have previously stated that they intend to continue the roll-outs in Bournemouth and Dundee that H2O Networks had started. Whether this will still be possible without the previous funding for the company and with money owed to Total Asset Finance is unclear.
> FROM WHAT HAS EMERGED SO FAR THE SCHEME DOES NOT LOOK AS IF IT HAD BEEN THOUGHT THROUGH
Meanwhile in the proper and correct world of banking, the earnings statement of KBC Group, for the fourth quarter 2010 and the financial year 2010, disclosed some limited new information regarding the KBC Lease UK “irregularities” with certain third parties, announced in early January. The initial maximum net provision of 150 million euros against potential losses has been re-estimated as 125 million euros. The group states that a provision for this upper boundary amount has been set aside. In addition, it reports that KBC has taken certain preventive legal measures it deems necessary to protect its interests, and to recover as much of this amount as possible. It has also filed an insurance claim aimed at recovering the amount at risk.
The local Belgian press has printed further details that appear to tie in with existing information. Reports refer to a scam involving fictitious contracts purporting to be from Total Asset Finance, to creditworthy end users, put to KBC Lease UK to refinance. Some contracts even went as far as head office for approval or otherwise. The scheme took longer to come to light because of an employee.
As it is the whole matter came out as a result of ongoing efforts to sell KBC’s leasing subsidiaries outside of Belgium, when due diligence in the UK unearthed the problems. It is not yet understood how the perpetrators of the scheme and its fictitious contracts planned to fulfil the lease rentals as they fell due, unless they planned for moneys from earlier refinancings to pay ongoing rentals as they fell due, in the style of a Ponzi scheme. However from what has emerged so far, the scheme does not look as if it had been thought through, although if KBC Group had not been planning to sell their UK leasing subsidiary and opened it up to due diligence, who knows how long it could have carried on for? ■
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