Secured bondholders in Melite Finance plc, a property group operating in Northern Italy that raised its loan capital on the Malta Stock Exchange, were waiting with bated breath the publication of the 2020 financial statements.
At long last, these were published at the eleventh hour of the 30th April deadline. And the results did not make nice reading. The Group “achieved” a further loss of €4.2 million to virtually erode all the shareholders’ funds. In fact, total equity now stands at merely just over €1 million whilst external liabilities well exceed €20 million. This gives a financial leverage or gearing ratio of 94%.
The woes of this Group owe their origin to well below the advent of COVID. The pre-covid business was largely confined to retail stores in Lombardy under the Accessorize franchise run by related parties of the shareholders.
The financial statements themselves admit once more that this business “had already been registering a marked reduction in turnover and margins on a store by store basis”. The partial pre-covid success may have caused enthusiasm to go to the head of the shareholders who thought that some smart thinking could quickly be turned into some windfall profits for them. Questions will be asked whether they hived off the long-term leases for an odd 25 stores portfolio to the Melite Finance Group, supported by professional valuers, were highly subjective and possibly overvalued.
The properties were in large part then sub-leased to an Italian company outside the group which is owned and managed by some of the same shareholders as those of the Melite Finance Group. This related third party sub-lessee suffered the brunt of COVID and went into voluntary administration and rescinded a large number of the sub-leases. Amounts due to Melite Finance by this third party company owned by parties related to the shareholders remain unpaid.
Evidently the fortunes of Melite Finance Group, and more importantly those of the related company (but outside the Melite Finance structure), did not materialise into the rosy picture the shareholders of Melite Finance envisaged: a story which they had painted with strong financial ratios in their bond pre-issue presentations to stockbrokers and in their November 2018 prospectus.
What could be considered astounding in this current scenario though is the high handed and arrogant stance that Melite Finance comes across in the Directors’ Report of its financial statements.
Subtle, and other not so subtle statements in the financial statements, may imply that the shareholders behind Melite Finance suggest that they expect the bondholders to bail out the ordinary shareholders. The directors intimate that they shall be seeking from the bondholders a revision of certain terms of the bonds in issue, possibly a resurrection of last year’s demand to seek a reduction of the interest coupon and the reduction of the security.
All the additional capital contributed by the Melite shareholders in the face of a staggering €6 million erosion of capital amounted to a mere €1 million. Andrew Ganado Ltd and GAN Ltd are offering further support of €150,000 “conditional on bondholder approval” of changes to the bond terms the Group will be shortly presenting to a Bondholders’ Meeting.
With clearly inadequate capital funding and liquidity, the Company still managed to adopt a going concern assumption.
The attitude of the Melite Finance Group and its directors could be perceived to be out of place. They should realise that there is no place for their high handed attitude and that in similar situations elsewhere in the Western world the ordinary shareholders lose all their risk capital, and all their say, and any restructuring is not dictated by the outgoing shareholders but by either new shareholders who are prepared to put their money where their mouth is or by a court-appointed administrator.
Ordinary creditors, and even more so secured creditors as are Melite Finance bondholders, can only be expected to make any concessions after the ordinary shareholders have lost all their risk capital and are out of the equation. Otherwise, in the face of the much-increased credit risk for bondholders, it is only logical for the interest coupon to go up and not to be reduced.
Further questions arise from the Melite Group financial statements just published. After the necessary consent the Company was seeking last year from the bondholders to rescind a number of the leases was not given, these were rescinded by Melite Finance any way.
To the author of this Opinion Piece, this is, in all probability, an event of default caused by the failure of Melite to abide by one of the primary obligations arising out of the Prospectus and other Issue documents.
This was the obligation of Melite to maintain and preserve all its immovable property rights which constituted the primary security comfort for the bondholders. Indeed the Group has even exposed itself to major damages towards the ultimate property owners. Even more significant than whether these rescissions technically constitute an event of default or not may lead to the inevitable conclusion of the lack of good faith exhibited by Melite Finance in carrying out a transaction unilaterally for what was previously being sought consent for.
The financial statements are audited by PricewaterhouseCoopers who concurred with the going concern assumption but covered themselves with a statement that there are significant doubts on the Group’s ability to continue as a going concern.
It could be said that external auditors ought not to be involved in this sort of activity. Melite Finance should be no repetition of what occurred in the notorious Electro Gas Malta Ltd case judging by the evidence of the Ministry of Finance Permanent Secretary at the DCG Board of Inquiry and “confirmed” by the certificate issued by Electrogas Commercial Director Catherine Halpin when stating that “PwC has supported us by providing various accounting, tax and auditing services and have been technically proficient, friendly and responsive” adding that PwC “have been flexible and where necessary have adapted their services to our needs”. Melite Finance bondholders do not want the external auditor to dabble outside their clearly defined territory, nor do they want them to be “flexible and where necessary adapt” to Melite Finance directors and shareholders’ needs.
I conclude by exhorting Melite Finance shareholders to come up with the necessary and adequate capital funding required to shore their company. They should avoid any attempt to force their way in a manner that none of the other Maltese bond issuing companies has had the arrogance and audacity to come up with. Not even so many other bond issuers who have similarly suffered the fate of COVID. Not even any of those of the second tier Prospects Market.
I trust the shareholders value their reputation and understand that in their capacity of risk-takers they must necessarily carry the can.
As to investors in bond issues, this episode reinforces the importance of having properly capitalised issues with acceptable gearing. It evidences once more the dangers of capitalised intangibles, so common in the balance sheets of many of our issuers.
Finally, this Melite case and other sad happenings continuously coming out in the open affecting the island’s political and business “leaders” also shows that reliance by investors on the “ostensible reputation” of some of the most renowned business leaders in the island is often a false hope and expectation.
This Opinion Piece is published by Paul Bonello in his personal capacity. In this respect, the opinions expressed are exclusively his and do not necessarily reflect the views of the newsroom.
Paul Bonello is the Managing Director of Finco Treasury Management Ltd, licensed investment services provider and stockbroker.
Questions sent to Melite Group were not answered by the time of publication.
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