COVID-hit Melite retail group meets resistance over bond restructuring

The Melite retail group has been asked by financial consultants and stockbrokers to rethink its plans to ask bondholders to accept a reduction of its bond interest rate, after the COVID-19 pandemic’s retail shutdown in Italy led to a rescission of shop leases.

The high street fashion franchise suffered a massive business disruption in its main Italian markets due to the pandemic, after having already registered reduced turnover and margins in 2019.

The Maltese retail group – owned mainly by the Alf. Mizzi Group and Lidsdale Limited – holds some 25 leases in the north of Italy for retail stores of the globally known Accessorize and Calvin Klein brands.

The bleak outlook for the Italian retail market will only see weak demand in the coming months, possibly lasting well into 2021. And despite retail outlets re-opening in Italy, virtually all of Melite’s tenants elected not to re-open at the start of summer: its sister company Melite Italia entered a process of voluntary administration to terminate 21 sub-leases while the sub-leases of two stories will be rescinded, leaving just two of Melite’s 25 leases occupied by tenants.

Bondholders who spoke to their market representatives reported that a confidential meeting held with Melite’s directors revealed a “palpable” negative feedback.

One bondholder who spoke to MaltaToday on condition of anonymity, was told that Melite’s shareholders proposal to loan the company some €1 million, which would be repayable, was described as “paltry”.

“If there are doubts on solvency, it does not seem enough that the shareholders attempt to finance the company through a repayable loan. I think it is unfair that ultimately it is bondholders who must bear the brunt of the restructuring by taking a reduction in our coupon, and seeing a substantial part of the security for bondholders given up.”

There has never been a default on the Maltese stock exchange, even in the smaller ‘second division’ of the prospects market. Melite’s request to bondholders is the first restructuring proposal tied to COVID-19 effects, with some observers who spoke to MaltaToday suggesting  that the next steps will have an effect on the confidence of retail investors in bond issues.

“The Melite bond was promoted as a secure bond, and the company’s shareholders do have standing the market. So resistance from the market to the restructuring plan knocks the wind out of their sails,” one market player, who spoke on condition of anonymity, said.

The company has to boot suffered in its pre-COVID performance, which saw a marked reduction in turnover and profit margins in 2019, primarily by its primary franchise Accessorize. COVID-19 precipitated matters for Melite by altering a turnaround plan intended to address the 2019 performance.

Melite issued a €9.25 million bond in 2019 to finance a restructuring of the group. Its principal activity is the acquisition and sub-leasing of property rights for Italian retail outlets, valued at €10 million.

But Melite’s plan to preserve the majority of its property rights will involve first the rescission of nine out of 25 leases.

Additionally, the shareholders of parent company Melita Retail will advance €1.1 million as part-capital contribution to the company (€630,000) that will be repayable at the option of the company after the 2028 bonds are redeemed; and €470,000 in a non-interest loan, repayable within five years.

The group will also be taking recourse to the COVID Guarantee Scheme offered by the Malta Development Bank, for a €449,000 loan to fund the forthcoming bond interest payments in November 2020.

However, the group also want to ask bondholders to reduce the bond interest rate from 4.85% to 3.5% as from November 2021. This will require holding a bondholders meeting.

Melite’s directors – Andrew and Christian Ganado, Jacqueline Briffa, Alan Frendo Jones, Stanley Portelli and Paul Mercieca – said they had reasonable expectation that the company had adequate resources to continue operating with bondholder approval for the changes in the bond interest rate.