Company News Safeguarding property rights in Upper Italy

Reference is made to the company announcement published by Melite Finance plc on 30 June, which informed the market, inter alia, of the negative impact of the COVID-19 pandemic on the business of the company; its subsidiary company and principal debtor, Melite Properties srl, which holds title as lessee to 26 retail stores in Northern Italy; and Melite Italia srl, a sister company of Melite Finance plc and sub-lessee of 22 out of the aforementioned 26 stores. The purpose of the present company announcement is to provide the market with an update on the position set out in the said company announcement.

Business update

Both the retail landscape and the commercial real estate landscape in Northern Italy, where the vast majority of the stores are located, have been subjected to significant and unprecedented change as a result of the pandemic. Indications are that retail sales have so far contracted by 25% in the case of bestperforming retailers and by as much as 85% in others.

Melite Properties’ tenants, all of which operate in the retail sector, have likewise been severely negatively affected, resulting in such tenants being unable to maintain rental payment obligations at the rates prevailing in Q1 2020.

The situation is not expected to improve significantly in the remainder of 2020 and remains uncertain going into 2021, as a combination of extremely limited tourism, office employees remaining at home “smartworking” and a subsisting fear of infection contribute to the extreme fluidity of the situation. As a result of this and the continued and possibly worsening effects of the COVID19 pandemic, the company 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.

The board of directors of the company continues to closely monitor developments in Northern Italy. Since lifting of the forced closure of retail stores across Italy, 18 out of 26 stores were reopened. Melite Properties’ management remains in constant contact with landlords with a view to safeguarding the company’s property rights over 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 management).

Melite Properties’ management is also in discussions with potential new tenants, either directly or through the use of multiple commercial estate agents, with a view to sourcing alternative tenants for the stores currently operated by Melite Italia. Throughout the “lock-down” period, management, represented by Andrew Ganado, held a series of negotiations with landlords, said potential new tenants as well as possible strategic partners in the commercial real estate sector set to assist management in securing new tenants for the stores.

Immediately following the lifting of the local travel ban on 1 July, Ganado travelled to Milan to further these negotiations in person and has continued to do so since. As indicated in the previous company announcement,

Melite Italia had informed Melite Properties of the intention to enter into a restructuring of its business and debts in terms of a procedure available in terms of Italian law.

Accordingly, sourcing alternative tenants for the stores, which are currently operated by Melite Italia, remains a key priority for the company and Melite Properties. As at the date hereof, management has sub-leased one store (Via Luini, Como), and has received enquiries with respect to its remaining stores. Negotiations remain ongoing and the market will be kept informed about the progress thereof on an ongoing basis.

At this stage, subject to a significant deterioration in the effect of the pandemic in Northern Italy, management is hopeful of completing a reassuring number of such deals in Q3 and Q4 2020.

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.

The board of directors of the company considers such arrangement, in the circumstances, to be the most practicable for the purpose of ensuring continued generation of income for use of the stores, albeit below rental income levels prevailing pre-pandemic, until such time as the operation of the stores may be assumed by new tenants which are in a position to meet the rental terms set by Melite Properties.

Furthermore, management, on the advice of commercial real estate specialists engaged to assist in the process of sourcing new tenants, is of the view that the likelihood of success of such a process is greater if the stores are operational and stocked, rather than vacant and less accessible.

Restructuring plan

In the context of the above, the board of directors of the company remains focused on taking such steps as may be necessary to ensure, to the extent possible, that the underlying business retains as much value as possible to enable the company to continue to service its obligations to the holders of the €9,250,000 secured bonds 2028 issued by the company.

As previously announced, the Board has secured shareholder funding in the amount of €1.1m (conditional upon bondholder approval of the restructuring plan to be presented by the company), with a view to supporting Melite Properties’ obligations towards landlords until such time as alternative tenants for enough of the stores may be found, and is in discussions with the company’s local bank with a view to securing recourse to the COVID Guarantee Scheme offered by the Malta Development Bank for an amount of €0.449m, which would enable the company to service, in full, the forthcoming bond interest payment due in November.