Melite Finance plc - Update on Restructuring Plan

On 13 August 2020, Melite Finance plc issued an update in relation to the proposed restructuring plan as previously outlined in the Annual Report and Financial Statements for the year ended 31 December 2019. In this respect, Melite Finance explained that both the retail and the commercial real estate landscapes in Northern Italy (where the vast majority of the 26 stores of Melite Group are located) have been subject to significant and unprecedented change as a result of the COVID-19 pandemic. Overall for the industry, indications suggest that retail sales have so far contracted by 25% in the case of the best-performing retailers, and by 85% in other stores. Specifically, the tenants of Melite Properties Srl – which is the operating arm of Melite Group and the principal debtor of Melite Finance – have likewise been severely negatively affected, resulting in such tenants (including Melite Italia Srl which is a sister company of Melite Finance plc and the sub-lessee of 22 out of the 26 stores of Melite Group) being unable to maintain rental payment obligations at the rates prevailing in Q1 2020.

Since the lifting of the forced closure of retail stores across Italy, 18 out of the 26 stores of Melite Group were reopened. Moreover, Melite Group remained in constant contact with the landlords with a view of safeguarding the property rights attached to the stores it plans on retaining, and has so far maintained regular payment of rent to landlords (as reduced, where possible, further to negotiations conducted by Melite Group). Melite Group is also in discussions with potential new tenants, either directly or through the use of multiple commercial estate agents, with a view of sourcing alternative tenants for its stores currently operated by Melite Italia. Throughout the “lock-down” period, Melite Group held a series of negotiations with landlords, sought potential new tenants and also pursued possible strategic partners in the commercial real estate sector.

Looking ahead, Melite Finance noted that it is not expecting the situation in business to improve significantly for the rest of 2020. Furthermore, uncertainty is expected to persist also in 2021 reflecting the extremely limited tourism numbers, the use of “smart-working” remote solutions for office employees as well as enduring fear of the virus. Coupled with the continued and possibly worsening effects of the COVID-19 pandemic, Melite Finance is not in a position to assess, with a significant degree of certainty, when, if at all, the performance of its business may return to pre-pandemic levels.

Following the intention expressed by Melite Italia to Melita Group to enter into a restructuring process of its business and debts in terms of a procedure available in terms of Italian law, the key priority for Melite Group has been the sourcing of alternative tenants for the stores which are currently operated by Melite Italia. In this respect, Melite Group was successful in sub-leasing one store (which is located in Via Luini, Como) and has received a number of enquiries with respect to the remaining stores as negotiations remain ongoing. At this stage, and subject to an improvement in the dynamics of the retail and property industries in Northern Italy, Melite Group is hopeful of concluding a reassuring number of deals in Q3 and Q4 2020. In the meantime, and until such time as negotiations with alternative tenants for the remaining stores are concluded, Melite Italia is expected to continue to operate from the stores in accordance with the terms of an agreement being entered into for the purpose of regulating such period of occupancy subject, inter alia, to an undertaking by Melite Italia to vacate such stores at short notice upon negotiations with new tenants being concluded.

Melite Group noted that it considers such arrangement with Melite Italia to be the most practicable for the purpose of ensuring continued generation of income for use of the stores, albeit below the rental income levels prevailing pre-pandemic. On the advice of commercial real estate specialists engaged by Melite Group to assist it in the process of sourcing new tenants, the likelihood of success of Melite Group to sub-lease its stores to new tenants is greater if the stores are operational and stocked, rather than vacant and less accessible.

In the context of the prevailing circumstances, Melite Group explained that it remains focused on taking such steps as may be necessary to ensure that its underlying business retains as much value as possible, thus enabling Melite Finance to continue servicing its obligations to the holders of the €9.25 million secured bonds which are repayable in 2028. Melite Group has secured shareholder funding in the amount of €1.1 million (conditional upon the approval by bondholders of the restructuring plan as proposed by Melite Group) with a view of supporting the Group’s obligations towards landlords until such time as alternative tenants are found. Moreover, Melite Group is in discussions with its local bankers with a view of securing recourse to the ‘COVID-19 Guarantee Scheme’ offered by the Malta Development Bank for an amount of €0.449 million as this would enable Melite Finance to service, in full, the forthcoming bond interest payment due in November 2020. These injections of fresh funds are intended to provide relief to Melite Group and its underlying business, and also allow the Group to forge a plan aimed at retaining as much as possible of the value of the property rights it holds and on which the future servicing and repayment of the bonds are ultimately dependent.

Melite Finance reiterated that the proposed restructuring plan is designed to salvage those stores (around 17 out of the total of 26 stores which are mainly located in city-centres rather than the harder-hit shopping centres) which, based on advice from commercial real estate specialists, are expected to be more likely to be sub-leased and attract a higher margin going forward. Melite Finance also expressed its intention of pursuing the proposed restructuring plan, certain elements of which require the approval of bondholders. Accordingly, Melite Finance is in the process of drawing up a bondholders’ circular for distribution to bondholders in advance of an eventual bondholders’ meeting to be convened in terms of section 5.12 of the Securities Note forming part of the Prospectus dated 12 November 2018. Such circular, together with the unaudited interim financial statements of Melite Finance for the period ended 30 June 2020 (which are expected to be published by the end of August 2020), are intended to provide bondholders with the information necessary to evaluate the proposals to be presented to bondholders for consideration and, if thought fit, approval.