Melite Finance bondholders asked to forgo entire 2021 interest

The Melite Finance bondholders are expected to be summoned for a contentious meeting to discuss the fate of the beleaguered fashion retail chain, on 12 November.

The notice comes just as Melite Finance published belated interim accounts in October, which shows the company’s equity had been wiped out.

With a devastating pandemic having closed down Melite’s chain of Accessorize shops across the north of Italy all throughout 2020, Melite Finance will be asking bondholders to consider its proposal to reduce its 4.85% coupon interest on their €9.25 million bonds as well as further reduce their security on the bonds.

The proposals for shoring up Melite’s dire financial situation are for secured bondholders to have their interest rate payable on the bonds from 4.85% to zero in respect of the bond interest due next month, the 23 November 2021; to 2.5% in respect of interest due in November 2022 and to 3% in respect of interest payable in November 2023, with the proposal indicating that Mellite “reserves the right” to extend the reductions of the interest over the remaining term of the bonds.

Besides a number of rescissions of property leases in northern Italy that have already taken place, the company is proposing further rescissions of property beyond the value allowed in the bond prospectus, a prospect that further dilutes the value of the bondholders’ security.

“The company is not making any positive proposals for remedying its dire financial situation.  In a situation where the company is insolvent and may possibly be wrongfully trading – were it not for a COVID legal reprieve – the shareholders are not proposing any recapitalisation, limiting themselves to a long-suspected plan of requesting a bail-out from the creditors, indeed secured bondholders of the company,” said Paul Bonello, of Finco Treasury Management, who represents a group of interested bondholders.

Originally, Melite had announced back in August a bondholders meeting for 8 October 2021, but this could not met as the company was finding difficulty publishing its interim accounts for end-June. By then, the company’s equity had been wiped out; were it not for a legal notice issued at the peak of the COVID pandemic, creditors could have petitioned the courts for a compulsory winding-up order.

The only executive director at subsidiary Melite Properties, Andrew Ganado, has since resigned from Melita Finance, with sources claiming Ganado had fallen out with shareholders and remaining board members. His administrative work has since been performed by company auditors PricewaterhouseCoopers, who also provide consulting services to the company and its shareholders.

In spite of this dual role from PwC, the audit firm was not prepared to subscribe to the going concern assumption for Melite Finance’s interim accounts. Trading in Melite bonds was suspended when the June financials were not published by the 30 September. When they were finally issued on 18 October, they came without the customary auditor review.

The interims revealed much of what was to be expected: the recurring losses of the group had resulted in a situation where shareholders’ equity has been completely cancelled, with a net asset deficit of €745,000.

The group suffered a massive drop in rental revenues between January and June 2021, down to €487,000 (€1.14m in 2020), leading to a gross loss of €709,000 due to the closure of outlets during the COVID-19 pandemic. Total pre-tax losses climbed to €1.98m after impairments on receivables and the value of leasehold premia.

Neither operating cash flows nor the committed funding from Melite’s shareholders, will be sufficient to service Melite’s debt servicing commitments. “In the event that the bondholders do not approve the proposed reduction in the bond interest coupon, the directors expect that the basis of preparation of financial information would need to be amended to a break-up basis,” Melite Finance said in the financial statements.

“These amendments would include revising the carrying value of the intangible assets to a forced sale basis, and furthermore an assessment of contractual obligations would need to be carried out which might result in the consequential recognition of other liabilities which are not yet known or reflected.

“These factors indicate the existence of a material uncertainty, which may cast significant doubt on the ability of the Group to continue as a going concern.”

In its circular of 18 October, Melita Finance said no further equity capital was being proposed to be put in by the shareholders of the company in order to address the capital and liquidity deficit.

Stockbroker Paul Bonello has been brutally candid in his assessment of the Melite requests. “The shareholders have the cheek of even expecting the repayment of infinitesimally small loans, in priority to the bondholders.”

And according to a circular from security trustee to the shareholders, Alter Domus, the company would have failed to respond to legitimate expressions of concern by the trustee.

“Melite’s proposals are indeed very dangerous because they set a precedent of a moral hazard whereby when so-called risk entrepreneurs get it wrong they can expect to restructure a company whereby they make no sacrifices and expect all from the creditors,” Bonello said.

“Nothing in the track record of this company and its directors, and in their arrogant and entitled attitude, inspires trust and faith. For the good of the bondholders, and indeed of the greater interest of the market, the proposals of the Board deserve nothing other than the thumbs down by way of an outright rejection.”