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UK's Metro Bank could win reprieve from regulator over funding requirements

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UK's Metro Bank could win reprieve from regulator over funding requirements

Metro Bank PLC is likely to win a reprieve from the Bank of England over its requirement to raise funds to meet new regulatory rules due at the start of next year, said analysts.

The bank had to raise new debt before the end of 2019 to meet requirements for the minimum amount of equity and subordinated debt that it must have in the event of resolution. This is its minimum requirement for own funds and eligible liabilities, or MREL, which acts as a capital buffer for the bank to absorb losses.

Metro Bank's shares plunged last week after it was forced to pull a high yield bond sale to raise funds for the MREL requirement. It was aiming to raise between £200 million and £250 million but had orders for just £175 million on Sept. 23, the day of the sale. This was despite offering a yield of 7.5% on the senior non-preferred bonds, said analysts, which is higher than other banks have offered for less risky bonds.

The bank is now reportedly seeking fresh investment in the business, while activist investors are also reportedly considering taking an equity stake in the bank or purchasing new debt at a higher coupon in a private placement.

"While the [Bank of England's Prudential Regulation Authority] is likely to grant [Metro Bank] a reprieve from its interim MREL requirement if necessary, this won't come easily and the regulator would surely like to see the board explore all options available to them before any such reprieve is forthcoming," analysts at Goodbody wrote in a note. "So, a potential investment in the debt and / or the equity at attractive terms could be secured."

An investment in the debt with attached conversion rights is the more likely outcome if third party investment is secured, said Goodbody; equity funding looks unlikely given the bank's woes. It warns that the ability of Metro Bank to secure such investment is highly uncertain.

The bank is being investigated by the Bank of England and the Financial Conduct Authority after it miscalculated its capital buffers at the beginning of the year. The FCA recently said it widened the scope of its investigation and the bank said it could take a significant financial hit as a result.

Goodbody has long held that Metro Bank's future as an independent bank is in doubt and has suggested the bank is likely to be acquired by a larger peer by the end of 2020. But it said Metro Bank could have an independent future if the bank's board can install a new, strong CEO with a realistic vision for the business.

Metro Bank declined to comment.