On 31 March 2020 the owner and operator of T1 Mall of Tallinn shopping centre, AS Tallinna Moekombinaat (TMK, a group subsidiary of AS Pro Kapital Grupp), submitted an application to Harju County Court for commencement of reorganisation proceedings with the purpose to overcome temporary liquidity issues, reasonably reorganise liabilities and increase profitability of TMK. On 3 April 2020 Harju County Court initiated reorganisation proceedings. On 2 June 2020 TMK has to submit to the Court a reorganisation plan on implementation of reorganisation measures, including impact of reorganisation to the creditors. The creditors will need to vote to accept the plan and the final decision on approval will be taken by the Court.
The initiation of reorganisation proceedings shall not influence in any way the day-to-day economic activities of the T1 Mall of Tallinn, its tenants and partners – it means that after the restrictions set by the Estonian government to the shopping centres are lifted, T1 Mall of Tallinn will be fully opened and shall continue its operations as before. The purpose of reorganisation proceedings is to ensure continuation of normal daily business by safeguarding the rights and interests of investors, employees, creditors and all cooperation partners. The reorganisation process involves only AS Tallinna Moekombinaat and has no direct influence to any other group company of AS Pro Kapital Grupp.
As at 31 March 2020, AS Tallinna Moekombinaat had 71 creditors with the total of ca 7 million euros past due debts. The main creditor is an international financing platform TSSP with Lintgen Adjacent Investments S.a.r.l acting as this lender’s agent. At the end of 2016, AS Tallinna Moekombinaat signed a loan agreement to finance the construction works of the shopping centre, situated at Peterburi road 2, for the total amount of 65 million euros. It is a specific 5-year development loan facility for interim financing, with a higher interest rate than cash flow project loans and this loan is repayable as a bullet at the end of the term. There has been a plan to refinance the abovementioned development loan with a cash flow project loan when the shopping centre reaches a stable cash flow generating ability. The development loan is secured with a pledge on Peterburi road 2 land plot in the amount of 84,5 million euros. On 31 March 2020, the principal amount of the loan was ca 75,4 million euros. The principal amount has increased by interests, which have been accumulated until interest payment start date. Interest payment obligation started in September 2019. High interest rate aside, the loan agreement also includes financial covenants as non-monetary obligations. Due to significantly longer launch period of the shopping centre and the consequent lower income performance than expected, AS Tallinna Moekombinaat has not been able to meet the agreed financial covenants nor pay correctly the interest payments to the lender. Also, TMK would not be able to repay the principal amount in case the loan is accelerated.
Today’s situation has been brought about by the following:
- The construction period overran and the centre was opened later than planned.
- The financial prognosis of AS Tallinna Moekombinaat were made in 2016, at the moment of signing of the loan agreement considering the market as at that time. During the construction period, the changes in the retail market influenced the strategies of many brands, making them more cautious to open new shops. Today, the centre still has vacant premises. The opening of some larger spaces with significant delay has also influenced the operations. Start-up of the centre has taken more time than originally planned and the revenues and results have not reached expected ones.
- In order to halt the spread of the corona virus, Estonia has declared an emergency situation in the country, as a result of which TMK has been forced to temporarily close down most of the T1 Mall of Tallinn centre (only Selver, a couple of food shops and the pharmacy are allowed to remain open).
Under these circumstances AS Tallinna Moekombinaat is not able to fulfil its monetary and non-monetary obligations before its creditors. AS Pro Kapital Grupp disclosed information regarding breaches of the TSSP agreement in its stock exchange notice of 28 February 2020 (please see the Chairman’s summary). Amidst the global pandemic situation of COVID-19, constructive negotiations with the lender have not yielded any results and there is a risk that the lender will terminate the loan agreement and accelerate the repayment of the loan. Also, there is no certainty how long the emergency situation will last and what will be its full impact on the operations of TMK. To ensure operations continue and that tenants, employees and other stakeholders of T1 Mall of Tallinn are protected, AS Tallinna Moekombinaat has submitted an application to commence its reorganisation proceedings. The next steps shall be to compile and approve a reorganisation plan, how to increase the operations of the centre to the maximum extent possible, given the temporary influence of the COVID-19 crisis on consumer behaviour and on the economy as a whole.
The operations of AS Tallinna Moekombinaat were profitable in 2019 – the centre generated operating profit each month. Due to high financing costs and the non-monetary decrease in the property value the net result at the end of 2019 was negative. TMK estimates to be able to fulfil its obligations, if the conditions of its debt would be reasonable (considering normal activities before emergency situation). As the management of the shopping centre considers its activities sustainable, the application for reorganisation is a necessary measure to protect its stakeholders. T1 Mall of Tallinn is a unique and first of its kind concept in the Baltics, which offers its visitors multifaceted entertainment next to a traditional shopping experience. In addition to the spacious and well-lit interior for shopping and art, T1 Mall of Tallinn also provides unique dining experiences in Estonia. Most of the restaurants and cafes are situated on the top floor above the shopping areas, offering views of the City. The centre has a state-of-the-art cinema, the largest inhouse family entertainment centre in the region Super Skypark and the Skywheel on the rooftop, which is one of its kind in all of Europe. Today, T1 Mall of Tallinn has ca 180 tenants, who together employ more than a thousand persons. Since the opening, close to 6 million people have visited the centre.
Update on other operations of AS Pro Kapital Grupp
AS Pro Kapital Grupp operates in the capitals of three Baltic states and in Bad Kreuznach in Germany.
- In Tallinn we are currently developing sea-side residential area of Kalaranna Kvartal in the City center and also Kristiine City not far from the City centre. The bank financing of the ongoing developments has been secured and relevant presales agreements with the clients have been signed to guarantee the necessary proceeds to complete the works. There is currently no stock of completed apartments available for sale in Tallinn. New apartments will be ready in 2021 and presales are ongoing. Construction works of Kalaranna Kvartal and Ratsuri Houses in Kristiine City are ongoing according to the plan and we currently do not foresee any delays in completion timing.
- In Riga there is currently no ongoing construction and preparations are being made to start the new stage of development in Kliversala Quarter and projecting is ongoing for the other two developments: in Tallinas and Brivibas streets. There is unsold inventory available in the River Breeze Residence, which is one of the high-end projects in the city. As the prices are in accordance with the luxury quality of the product, the sale of this project has been slower than in Tallinn, already before the start of the pandemic Though, there has been some interest towards the apartment sale in spite of the economic situation in the world. The remaining loan balance related to the unsold inventory in River Breeze Residence is 1,7 million euros.
- In Vilnius construction of five new residential buildings was completed in 2019. More than 70% of the apartments have been sold and there have been customers interested in buying apartments even during last weeks. The development loan has been repaid in full.
- In Bad Kreuznach our hotel operations were paused from 23 March until 30 April according to local restrictions set in relation to corona virus spread. The hotel operator expects to retain all the workforce and is meanwhile minimizing the costs to be ready to reopen in full after release from restrictions.
Considering the start of new residential developments, AS Pro Kapital Grupp will monitor the economic situation in all Baltic countries and in the world in general and if necessary, might postpone its development plans until the situation will stabilize. To secure health and wellbeing of our employees, clients and partners, the employees in our offices are working remotely, however being available by e-mails and on the phone. We are reviewing our fixed and variable costs and plan to make adjustments to spending where appropriate. AS Pro Kapital Grupp has reported the consolidated cash balance over 10 million euros on its accounts as at 31 December 2019 and has in February successfully refinanced secured bonds with the new ones, which are redeemable in 2024. Although the economies of the world have been severely hit by the current situation, the business model of AS Pro Kapital Grupp is having a long- term view. We are constantly reviewing our risks and we strive to minimize any external impact to enable AS Pro Kapital Grupp reach its targets.