Plans to force bondholders of a Maltese fashion franchisor to forgo interest payments after COVID-19 lockdowns ravaged rental income at Melite Properties in Italy, were amended in the Eleventh time.

Initial plans to require bondholders to reduce their coupon for the next three years in an effort to contain Melite’s loss in rental income – particularly to zero for 2021, then to 2.5% and 3% for the following years – the roles were reversed with an injection of social capital.

About 70 bondholders were in attendance at a long-awaited extraordinary general meeting last Thursday, where securities broker Paul Bonello, whose firm Finco Trust represents a group of bondholders, gave the meeting a worrying warning.

“This meeting is of great importance in the history of capital markets in Malta … it is the first such challenge to face our market, because if investors had not shown great resistance to this foolish proposition, the precedent would have been formidable.

With a devastating COVID-19 pandemic shutting down Melite’s Accessorize store chain in northern Italy throughout 2020, shareholders of franchisors were keen to inject new capital until last week.

The about-face came with a contribution of € 660,000 from Alf Mizzi & Sons, which is in addition to a previous contribution of € 638,000 from Alf Mizzi (€ 443,000 in total), Marina Milling as well as Daystar Holdings by Michael Soler. The capital injection will be transformed into preferred shares classified after bonds, and without a fixed coupon.

“We wish to clarify that this is not due to a legal obligation, and that this will be the last capital contribution or support that Alf Mizzi will bring to Melite Finance directly or indirectly and should in no case be interpreted as creating any precedent or expectation of additional contributions in the future, ”Melita said in her latest company statement.

The retail investment market in Malta indeed tends to be characterized by unsophisticated investors who have great confidence in the bond market, which always pays its interest.

In this case, the Melite Finance bond – a bond of 9.25 million euros paying 4.85% per annum – bore the name of its shareholders, Alf. Mizzi Group, Marina Milling and Lidsdale, whose directors are the Soler and Ganado groups of companies.

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

But he criticized the group of companies’ right to ask their bondholders to take the brunt of its COVID losses. “Expecting the small fry to bow under the pressure of the big one was never going to be a solution. It was an unsuccessful attempt to stomp the Maltese bond … but at least one shareholder, Alf Mizzi & Sons, was still ashamed to do what he should have done in the first place and invest more capital ”Bonello said.

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

The shareholders’ response was to strengthen their equity needs with a loan of 1.1 million euros, instead of increasing their share capital; Melite Finance also obtained € 449,000 from the Malta Development Bank’s Covid guarantee program to meet its interest payments.

But instead of putting in the necessary capital as liabilities rose, shareholders planned to ask bondholders

Bonello issued a harsh rebuke to Melite’s board of directors over the effects of COVID on businesses. “The pandemic has negatively affected many companies in Malta … but none of those whose bonds are listed on the stock exchange or on the outlook market have considered not paying their interest. Sadly, the confidence of Melite bondholders was shattered after this attempt to cut their coupon, long after Melite sold its real estate leases to a special purpose vehicle, based on revaluations by its hand-picked appraisers.

Bonello said this was the exact opposite of what would have happened in foreign markets, saying shareholders unable to provide the required capital would have left the company. “Indeed, the coupon should have been increased when the risk to the secured bondholders increased due to the losses of the company and the sale of its leases, and not – as the board of directors of Melite did. predicted – that bondholders become the sacrificial lamb and save the company, rather than the shareholders as risk takers.