‘Old money’ backers of troubled fashion chain want bondholders’ bailout, stockbroker says

Malta owners of Accessorize franchise in Italy must recapitalise company, not ask bondholders to suffer risk, says stockbroker Paul Bonello

Stockbroker Paul Bonello
Stockbroker Paul Bonello

The stockbroker Paul Bonello has called out attempts by the Maltese franchise-holders of Accessorize in Italy to ask bondholders to accept lower returns on their investment, after COVID-19 aggravated losses for their retail outlets.

The Melite group reported €3.5 million in losses in the first six months of 2020, as its Accessorize, Monsoon and CKU retail outlets were forced shut by the COVID-19 pandemic in Italy.

But even more worrying, its capital and reserves have dwindled from €6 million to a mere €2.2 million.

Bonello, who represents a group of bondholders, has taken issue with Melite’s request to slash their bond’s interest rate when the shareholders themselves have only offered to prop up the company with a shareholders’ loan that must be repaid.

“The proposals are nothing but a bail-out by the bondholders of the shareholders’ investment. It must be rejected,” Bonello, who famously took on Bank of Valletta when one of its asset funds went belly-up, recovering millions in savings through years of legal action and campaigning.

A comment was sought from Melite, whose company secretary said the board would not comment in the press due to listing rules, but that it would keep the market informed about its situation through Malta Stock Exchange statements.

Melite’s 2019 financial statements had already suggested that the retail powerhouse was experiencing challenging trading conditions. Since the re-opening of retail stores across Italy in July, 18 out of 26 Stores were reopened, but the harsh effects of the pandemic have hit Italy hard: Melite said retail sales had contracted by 25% in the case of best-performing retailers, and by as much as 85% in others.

Bondholders think the proposed restructuring is one-sided and unorthodox. They will bear the brunt of the sacrifice without shareholders putting up any further capital, but only minimal amounts by way of short-term shareholders’ loans Paul Bonello

The company has secured €449,000 from the Malta Development Bank’s Covid Guarantee Scheme to meet its interest payments for its €9.25 million bonds. And while shareholders will extend a €1.1 million loan to the company, Melite has yet to achieve bondholders’ approval to reduce the bond interest rate from 4.85% to 3.5% as from November 2021.

Bonello however thinks that the company could move into net asset deficit territory in the future. “The company’s reaction so far has been to expect the secured bondholders to make big sacrifices – a reduction of the interest coupon, as well as giving up a substantial part of the security held, the rescission of at least nine of its leases.”

The leases on these shops in northern Italy had a pre-COVID value of some €3 million. Once rescinded, they would take the company into further asset deficit.

Bonello has complained that the shareholders – arguably among Malta’s most powerful businesses groups with Alf. Mizzi, Marina Milling, and the Ganado family – have not proposed increasing share capital, or alternative security for the bond by way of a shareholders’ guarantee.

“Bondholders think the proposed restructuring is one-sided and unorthodox. They will bear the brunt of the sacrifice without shareholders putting up any further capital, but only minimal amounts by way of short-term shareholders’ loans.

“My opinion as a financial analyst and stockbroker is that what the company needs to survive and service its debts is a substantial injection of anything between €3-€5 million. It’s the only way to restore the ratio of funds-to-liabilities, to acceptable and respectable levels.”

Bonello also suggested that bondholders’ frigid response to a cut in their interest coupon means auditors should not have assumed that Melite could be a “going concern” when the restructuring agreement is still in the balance.

“I think it is based on a hypothetical assumption which the directors know stands little chance of materialising,” Bonello said, taking aim at PricewaterhouseCoopers in the process. “I’m flabbergasted at the increasingly conflicting situation of the external auditors, who are simultaneously consultants to the company: in a situation where it is borderline whether the company is solvent or not, PwC ought to have remained aloof from the management of the company in order not to compromise the objective and impartial stance expected of auditors.”

Bonello said Chinese walls could not give effective objectivity or independence, citing the Electrogas saga in which PwC was said to have provided both auditing as well as tax and due diligence services. “The MFSA would do well not to allow this rampant practice of allowing audit firms provide multiple services to clients to maximise their fees.”

An event of default by Melite would constitute the first ever on the Malta Stock Exchange. Bonello thinks it would send shockwaves to the bond market.

“Cutting the coupon rate could set a precedent for companies to have risk, caused by developments such as COVID, suffered by bondholders rather the equity risk-takers. If a company like Melite, whose shareholders enjoy such good standing, do this, what would other issuers, especially those in the second-division bond market, do? Practically all bond issuers have suffered similar setbacks due to COVID-19.”

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