Metro Bank secures £325 million financing deal

Metro Bank has successfully concluded intensive negotiations with investors over the weekend, resulting in a financing arrangement that provides crucial breathing space for the UK challenger bank. The trajectory was uncertain prior to this announcement as Metro Bank explored various avenues to secure essential funds, including equity and debt issuance, refinancing and potential asset sales, while contemplating collaboration with high street lenders to alleviate its mortgage portfolio.

The closing deal, announced yesterday, entails a £325 million capital tranche, split between £150 million of fresh equity from Metro’s largest shareholders and £175 million of new debt from bondholders.

Colombian billionaire takes control

Colombian billionaire Jaime Gilinski Bacal, (in photo above), Metro’s largest shareholder, is set to contribute £102 million of the new equity, making him the majority shareholder and paving the way for potential transformative actions. Known for his track record of acquiring banking assets at opportune moments, Gilinski Bacal may steer Metro Bank towards more  strategic acquisitions.

New chapter for Metro Bank

In addition to the equity raise, Metro’s financing package encompasses £600 million of debt refinancing. This involves Tier 2 bondholders accepting a 40 percent to 45 percent reduction on their investments, a move essential for the bank’s financial revitalization.

Metro Bank’s CEO, Dan Frumkin, characterized the financing package as a “new chapter” for the institution, signalling optimism for the future. Gilinski Bacal agreed and said that he believed in the package’s ability to fuel growth and build upon the bank’s recent foundational work.

Metro’s board has been engaged in discussions with investors regarding the capital injection and has explored interest from some of the UK’s major banks in specific assets. The Bank of England had approached potential buyers, including NatWest, Santander, and Lloyds Banking Group, as reported by the Financial Times.

Challenges and growth ambitions

While Metro Bank has gained recognition for its distinctive customer service, it faced challenges, including a stock market devaluation after a significant accounting error in 2019. Regulatory hurdles last month related to capital requirements further intensified its predicament.

In tandem with the financing package, Metro Bank is in negotiations to potentially divest up to £3 billion in residential mortgages. This move is anticipated to bolster the bank’s capital ratio, reducing its risk-weighted assets by approximately £1 billion.

Path forward and regulatory approvals

Metro Bank anticipates releasing a prospectus and shareholder circular in the upcoming weeks, with plans to conclude the financing arrangement in the fourth quarter. The injection is expected to elevate its common equity tier 1 ratio above 13%, surpassing regulatory mandates.

However, the equity issuance will be priced at 30p per share, representing a discount from the Friday closing price of 45p, resulting in material dilution for current shareholders. Metro Bank’s CEO, Dan Frumkin, is investing up to £2 million in the equity raise.

Regulatory greenlights are integral to the financing deal, involving a comprehensive change of control assessment by the Bank of England’s Prudential Regulation Authority. This assessment reflects Gilinski Bacal’s Spaldy investment vehicle’s acquisition of more than 50% of Metro’s shares post-agreement.

The Financial Conduct Authority, jointly overseeing Metro with the PRA, will also scrutinize the financing arrangement as the bank seeks a revitalized path forward.

Prior to financing deal

In the weeks leading up to Metro Bank’s recent financing deal, a consortium of bondholders, represented by investment banking firm PJT Partners, proposed a significant £600 million capital injection to bolster the bank’s balance sheet.

Despite the offer’s potential significance for the bank’s financial stability, Metro Bank did not accept the proposal. Concurrently, specialist lender Shawbrook, supported by BC Partners and Pollen Street Capital, continued to express keen interest in acquiring Metro Bank, with ongoing discussions spanning the past year. Shawbrook’s board remained on standby, prepared to engage in discussions over the weekend should Metro Bank or the Bank of England’s Prudential Regulation Authority (PRA) initiate contact.

These developments highlight the dynamic nature of the situation as Metro Bank navigated the complex terrain of financial resilience. Regulators’ refusal to lower capital requirements associated with the mortgage business, coupled with the impending £350 million debt refinancing obligation by October 2024, highlighted the bank’s quest for stability amid a changing banking landscape, where maintaining a branch network has today incurred significant costs and faces demands digitization.

JP Morgan did not proceed with acquisition

JPMorgan Chase had also explored the possibility of acquiring Metro Bank before ultimately deciding against it, citing the additional capital requirements a new buyer would face. The US banking giant’s deliberations led to the conclusion that proceeding with the deal was not viable. The potential acquisition would have been executed through JPMorgan’s British digital banking unit, Chase UK, which boasts over one million customers in the UK.

Metro Bank had recently disclosed its consideration of various options, including equity and debt issuance, refinancing, and asset sales, as it sought to raise up to £600 million. The bank aimed to secure new funds before the stock market opened on Monday. The Bank of England’s Prudential Regulation Authority had also approached major UK banks to gauge their interest in Metro Bank, with a preference for bids encompassing the entire bank rather than specific segments. In a contrasting context, JPMorgan had played a crucial role earlier this year by taking over a distressed First Republic, helping mitigate a liquidity crisis among smaller US banks.

Fluctuations in share price

The bank’s share price exhibited notable fluctuations reflecting ongoing regulatory scrutiny and due diligence before the financing deal was announced, with a 26 percent drop followed by a 21 percent recovery.

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