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6 maltatoday | SUNDAY • 20 SEPTEMBER 2020 NEWS MATTHEW VELLA THE stockbroker Paul Bonello has called out attempts by the Maltese fran- chise-holders of Accessorize in Italy to ask bondholders to accept lower returns on their investment, after COVID-19 ag- gravated 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 re- tail outlets were forced shut by the COV- ID-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 share- holders' 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 cam- paigning. 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 state- ments. Melite's 2019 financial statements had already suggested that the retail pow- erhouse 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 contract- ed by 25% in the case of best-performing retailers, and by as much as 85% in others. The company has secured €449,000 from the Malta Development Bank's Cov- id Guarantee Scheme to meet its interest payments for its €9.25 million bonds. And while shareholders will extend a €1.1 mil- lion loan to the company, Melite has yet to achieve bondholders' approval to re- duce the bond interest rate from 4.85% to 3.5% as from November 2021. Bonello however thinks that the compa- ny could move into net asset deficit terri- tory in the future. "The company's reac- tion 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 se- curity 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 share- holders – arguably among Malta's most powerful businesses groups with Alf. Mizzi, Marina Milling, and the Gasan and Ganado families – have not proposed in- creasing share capital, or alternative secu- rity for the bond by way of a shareholders' guarantee. "Bondholders think the proposed re- structuring is one-sided and unorthodox. They will bear the brunt of the sacrifice without shareholders putting up any fur- ther 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 accept- able and respectable levels." Bonello also suggested that bondhold- ers' frigid response to a cut in their in- terest 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 Pricewater- houseCoopers in the process. "I'm flab- bergasted at the increasingly conflicting situation of the external auditors, who are simultaneously consultants to the com- pany: 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 im- partial 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 equi- ty risk-takers. If a company like Melite, whose shareholders enjoy such good standing, do this, what would other issu- ers, especially those in the second-divi- sion bond market, do? Practically all bond issuers have suffered similar setbacks due to COVID-19." mvella@mediatoday.com.mt Stockbroker calls out Melite 'bail-out' Shareholders must recapitalise company, not ask bondholders to suffer risk, says stockbroker Paul Bonello Bonello says the shareholders – arguably among Malta's most powerful businesses groups with Alf. Mizzi, Marina Milling, and the Gasan and Ganado families – have not proposed increasing share capital. "Bondholders... will bear the brunt of the sacrifice.." Finco Treasury partner Paul Bonello NICOLE MEILAK MALTA'S public finances de- pend heavily on revenue derived from VAT, making up 22.8% of government's total tax revenue in 2018. But no government can recover all VAT revenue legally collect- able, largely due to tax fraud or maladministration. This is re- flected in the so-called VAT gap. The VAT gap is the difference between expected revenues from VAT, and the actual sum collect- ed by authorities. Expected VAT, or VAT Total Tax Liability (VT- TL), is the estimated amount of VAT that a government can the- oretically collect. According to the European Commission's 2020 VAT Gap report, Malta's VAT Gap for 2018 stood at 15.1% of total col- lectable VAT, the sixth highest gap in the EU. Nominally, this is reflected as a loss of €164 million worth of tax revenue during that period. While standing above the EU average, Malta's VAT gap has been on the decline since 2014, when it stood at 31.3% of VTTL, falling by 16.2 percentage points. The VAT gap provides a relia- ble measure of the effectiveness of VAT enforcement and com- pliance procedures. The higher the gap, the more tax is being lost to the undeclared economy. It could also signal losses from tax evasion, corporate insolvency, or legal tax optimisation. At EU level, the VAT gap stood at €140 billion throughout the bloc, with a total revenue loss of 11%. There was a marginal im- provement over the years, but the COVID-19 pandemic might deal a significant blow to the progress made. A decline in eco- nomic growth, and deteriorating government balances could see the EU's VAT gap increase in 2020, possibly reaching €164 bil- lion in tax losses. Malta's VAT gap is sixth- highest in EU