Shares in Metro Bank PLC sank to a new low on Tuesday after the bank had to pull a £200 million bond sale after failing to win sufficient orders from investors.
The bank's stock has fallen more than 90% over the year and plummeted almost 27% in early-afternoon trading in London from the prior-day close.
Metro, founded by Vernon Hill who will step down as chairman but remain on the board, 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. It originally claimed to have discovered the miscalculation itself before admitting that the BoE had was discovered the error. Metro's share price has been on an almost permanent downward trajectory ever since and it has been forced to raise capital. The FCA said last week that it had widened the scope of its investigation and the bank said it could take a significant financial hit as a result of the probe.
The bank had to raise new debt before the end of the year to meet regulatory requirements for the minimum amount of equity and subordinated debt that it must have in the event of resolution. This is called its MREL requirement and it acts as a capital buffer for the bank to absorb losses. Metro's interim MREL requirements are due to come into force on Jan. 1, 2020.
Metro was aiming to raise between £200 million and £250 million but had orders for just £175 million by mid-afternoon on Monday, Sept. 23. This is despite offering a yield of 7.5% on the senior nonpreferred bonds, according to analysts, which is higher than rival banks have offered recently for less risky bonds.
These types of bonds are more risky than traditional senior debt because in the event of a default the priority for repayment is given to traditional senior bonds.
Business model under threat
Analysts at Goodbody calculated that Metro needed to raise £250 million in MREL-eligible debt in order to meet its regulatory requirements and said the move signaled further trouble ahead for the bank. It suggested it might begin talks with the BoE over the MREL requirement rather than seek to raise more debt in the near future.
The bank's entire business model — dependent on traditional high street branches open seven days a week — is under pressure, said Goodbody. This rebuff from the market meant that if Metro does try to issue MREL-eligible debt again it would pay a high price.
"The fact that it appears that Metro couldn't raise the funds at an uncharacteristically high price for such issuance has to call into question the risks to Metro's future as an independently listed entity," said Goodbody.
It said it believed a third-party sale would be the best outcome for equity holders and it expected the bank to be sold by the end of next year.
Metro issued a statement in which it thanked the "broad number" of investors who had expressed an interest in the MREL issuance and said it had a strong capital position and the flexibility to raise MREL "at the right time for the bank."
It declined to comment on the price of the bond issuance or on any conversations it may or may not be having with the regulator.
