UK challenger bank Metro Bank plans to raise £325m in capital, including £150m of new equity and £175m of new MREL issuance, and £600m of debt refinancing to address worries about its balance sheet and its future.
The equity raise will be led by Spaldy Investments, the investment vehicle of Colombian billionaire Jaime Gilinski Bacal, which is contributing £102m and will increase its shareholding from 9% to about 53%. Shares will be placed at 30p apiece.
Metro said it is also discussing selling £3bn of residential mortgages to reduce its risk-weighted assets by about £1bn to lift its capital ratio.
The package was announced late on Sunday. The three elements are interconditional and subject to shareholder and noteholder approval and some other conditions.
John Cronin, analyst at Goodbody, said approval was not assured but it seemed as if the deal would get the go-ahead. "Not the best possible outcome for shareholders and bondholders by any stretch but it does secure Metro Bank’s longevity as an independent institution and no one loses everything," Cronin said in a note.
The UK's Prudential Regulation Authority said it welcomed Metro's moves to strengthen its capital.
Metro said the capital raise and debt refinancing come from existing shareholders and noteholders and some new investors. It will improve the bank's Common Equity Tier 1 capital ratio to more than 13% and extend the maturity profile of its debt securities and lift its pro forma MREL ratio to at least 21.5%.
Metro Bank was founded in 2010 and is considered the leading challenger to the established UK banks, but it has hit a string of problems in recent years, including accounting errors, leadership departures and delays in getting approval from UK regulators for capital reliefs.
Its shares crashed to 34.5p last week, down 66% from September 11, as worries about its future escalated. But they rebounded on Friday and were up 20% at 54.2p early on Monday.
A major worry for investors has been MREL debt. Metro Bank's existing £350m MREL senior instrument has a first call date of October 2024, after which the instrument is no longer MREL eligible and Metro would fall below its minimum regulatory requirement. Chief executive Dan Frumkin acknowledged that MREL "cliff edge" in an earnings call in August.
Cronin said uncertainty around that refinancing "has been the key trigger" for the capital plan and criticised why a smaller bank needs MREL at all, creating a complex capital structure destabilising the bank rather than stabilising it.
Metro Bank said a liability management exercise – aimed at refinancing and adding to its MREL debt by offering holders longer-dated bonds with higher coupons – has secured 100% support from noteholders identified and is expected to reach 75% voting thresholds required for 100% noteholder participation. The LME targets both Metro's outstanding bonds: its £250m 9.139% fixed-rate reset callable subordinated notes due June 2028 and the £350m 9.5% fixed-rate senior notes due October 2025.
The debt refinancing will involve a 40% haircut on the notional amount of the Tier 2 instrument, which will rise to 45% if 75% of noteholders by value of the Tier 2 instrument do not support the plan by October 13.
It also involves the exchange of the balance of the notional amount of the Tier 2 instrument on a par-for-par basis for a new subordinated 10NC5 Tier 2 instrument, which will have a coupon of 14%, a call date of April 2029 and a maturity date of April 2034.
Meanwhile, an MREL senior instrument with a coupon of 12% and a call date of April 2028 will be offered to holders of the existing £350m 9.5% MREL senior note in a 100% par-for-par exchange – though a 5% haircut will be made if 75% of noteholders by value of the instrument do not sign up by October 13.
In addition, £175m of new MREL senior notes will be issued with the same terms. Metro said "a number" of existing noteholders have committed to subscribe for £175m at par value in the new MREL senior instrument maturing in April 2029.
Metro said the capital raising and asset sale will allow it to accelerate earnings growth and deliver a return on tangible equity of 9% or more in 2025 and at least 10% over the medium term. The bank also launched a cost reduction plan to save £30m a year and said it aims to shift its business towards specialist mortgages and commercial lending.
Gilinski has been an active investor in Metro Bank since 2019 and was already the biggest shareholder. He also has investments in banks in Latin America and Spain.
Metro said it expects to complete the capital package before the end of the year. Morgan Stanley is lead financial adviser, debt financial adviser and asset sale adviser. RBC Capital Markets is financial adviser, sponsor and sole bookrunner on the equity raise. Moelis is debt financial adviser.