9th Oct 2023 11:00
(Alliance News) - Metro Bank Holdings PLC on Monday announced a new deal with investors to shore up its finances, helping avert "another crisis" in the banking sector in the eyes of AJ Bell's Russ Mould.
The deal includes a GBP325 million capital raise and GBP600 million in debt refinancing.
Spaldy Investments Ltd, Metro Bank's largest shareholder, is contributing GBP102 million and will become the controlling shareholder of Metro Bank upon completion of the transaction – with roughly a 53% shareholding.
It comes after Metro Bank's shares tumbled last week on reports it was in talks with investors to raise around GBP250 million in equity funding and GBP350 million in debt.
Metro Bank shares also suffered last month after UK regulators refused to approve a request from the bank to lower the capital requirements attached to its mortgage business.
Mould, investment director at AJ Bell, said Metro Bank's fundraising agreement is important on two counts.
"First, it avoids any panic and a run on the bank, something that could have feasibly happened if it had not raised a significant amount of cash over the weekend to shore up its balance sheet. Second, it provides breathing space for the company to conclude talks on asset sales," he said.
Metro Bank is one of the UK's top 10 banks, with around 2.7 million customers and 76 branches across the UK, having launched its first branches in 2010 as a challenger to the established players.
Shares in the bank have lost nearly two-thirds of their value over the past six months, with its stock market value much reduced in recent years. It now has a market capitalisation of less than GBP100 million, having been valued at around GBP3.5 billion at its peak five years ago.
AJ Bell's Mould said, moving forward, there will "undoubtedly" be customers who may prefer to shift their money to a different bank. Consequently, he said Metro Bank will need to find a way to keep its clientele happy and still win new business, which Mould argued is going to be a "tough job".
"It is time for a radical rethink of how the company operates. A high-cost base is unsustainable, so something has to change. If not, Metro Bank might find itself gobbled up by a bigger company whose first job will be to shut down its expensive branch network," he said.
For Gary Greenwood, research analyst at Shore Capital, Monday's deal was a "very painful rescue" for Metro Bank's existing equity and debt holders.
Greenwood estimated that Metro Bank's existing shareholders, who are either "unable or unwilling" to participate in the equity raise, will see their shareholding diluted by "around two thirds".
He also predicted pain for the bank's existing bondholders, noting that the debt refinancing results in a "40% haircut" on the GBP250 million of outstanding tier two bonds.
"This process disrupts the normal order of seniority with bondholders taking a hit before equity holders have been completely written down, thus echoing the Credit Suisse rescue where AT1 holders were written off entirely while equity holders partially survived. This was no doubt a condition of Spaldy's agreement to support the rescue but is nonetheless concerning for bond investors in bank debt," he said.
"In the end, this may have been the only option for the group, with potential trade buyers of the business said (by the media) to have been concerned about the lack of time to perform proper due diligence and having a reluctance to take on the group's expensive branches."
Greenwood concluded that while Metro Bank now finds itself in a position where it can continue to trade, it remains to be seen whether it can deliver on its growth ambitions to "leverage its expensive cost base and improve returns".
Shares in Metro Bank surged 22% to 55.30 pence on Monday morning in London. Over the past six months, however, the stock is down 28%.
By Heather Rydings, Alliance News senior economics reporter
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