Melite Finance volte-face wards off unprecedented challenge to investors

Plans to force bondholders of a Maltese fashion retail franchiser to forgo their interest payments after COVID-19 lockdowns ravaged Melite Properties’ rental income in Italy, were changed at the eleventh hour.

From initial plans to ask bondholders to have their coupon reduced for the forthcoming three years in a bid to contain Melite’s rental income losses – specifically down to zero for 2021, and then 2.5% and 3% for the next years – the tables were turned with an injection of shareholders’ capital.

Around 70 bondholders were present at a long-awaited extraordinary general meeting last Thursday, where stockbroker Paul Bonello, whose firm Finco Trust represents a group of bondholders, addressed the meeting with an ominous warning.

“This meeting is of great importance in the history of capital markets in Malta... it’s the first challenge of its kind to face our market, because had investors not shown great resistance to this senseless proposal, the precedent would have been a great one indeed.”

With a devastating COVID-19 pandemic having closed down Melite’s chain of Accessorize shops across the north of Italy all throughout 2020, the franchisers’ shareholders were holding out on injecting any new capital right up until last week.

The volte-face came with a €660,000 contribution from Alf Mizzi & Sons, which comes over and above a previous €638,000 contribution from Alf Mizzi (€443,000 of total), Marina Milling as well as Michael Soler’s Daystar Holdings. The capital injection will be turned into preference shares ranked after the bonds, and with no fixed coupon.

“We wish to make it clear that this is being done not because of any legal obligation, and that it will be the last such capital contribution or support Alf Mizzi makes to Melite Finance directly or indirectly and must in no way be construed as creating any precedent or expectation of further contributions in future,” Melita said in its latest company statement.

Malta’s retail investment market indeed tends to be characterised by unsophisticated investors who have great trust in the bonds market, as one that always pays out its interest payments.

In this case, the Melite Finance bond – a €9.25 million bond paying out a 4.85% a year – carried the name of its shareholders, the Alf. Mizzi Group, Marina Milling, and Lidsdale, whose directors are the Soler and Ganado business groups.

“These investors believed they could blindly trust the business acumen, honesty and integrity of the shareholders, who are considered to have a good reputation in Malta,” Bonello told the bondholders’ meeting.

But he was critical of the business group’s entitlement in asking their bondholders to take the hit of its COVID losses. “Expecting the small fry to buckle under the pressure of the big guy was never going to be a solution. This was a failed attempt to trample on the Maltese bondholder... but at least one shareholder, Alf Mizzi & Sons, had some shame left in them to do what should have done at the start and invest more capital,” Bonello said.

Melite Finance was hard-hit by the COVID-19 lockdown in Italy in 2020, forcing it to shut down its stores and find new tenants for several of its stores. The retail franchise chain suffered €4.2 million in losses in 2020 due to the closures of its 26 Italian fashion shops for the Accessorize, Monsoon and CKU brands, and more worryingly saw its equity spiralling down to €1.3 million at end of year 2020. Between January and June 2021, it suffered pre-tax losses of €1.98m after impairments.

The response of the shareholders was to shore up capital requirements with a €1.1 million loan, instead of increasing their share capital; Melite Finance also secured €449,000 from the Malta Development Bank’s Covid Guarantee Scheme to meet its interest payments.

But instead of putting up the necessary capital as liabilities mounted, the shareholders planned to ask bondholders

Bonello gave Melite’s board a stern reprimand over the effects of COVID on businesses. “The pandemic affected negatively many businesses in Malta... but none of those whose bonds are listed on the Stock Exchange or the Prospects Market considered not paying their interest payments. Unfortunately, Melite’s bondholders’ trust was reduced to nil after this attempt to reduce their coupon, well after Melite sold its property leases to a special purpose vehicle, on the basis of revaluations by its hand-picked valuers.”

Bonello said this was the exact contrary of what would have happened in the foreign markets, saying shareholders unable to put up the required capital would have exited the company. “Indeed the coupon should have been increased where the risk for secured bondholders had grown due to the company’s losses and the sale of its leases, and not – as Melite’s board expected – have bondholders become the sacrificial lamb and save the company, rather than the shareholders as the risk-takers.”