Metro Bank secured a funding deal worth £925 million last night. The deal will help the struggling lender, but it will also hurt its investors. It is likely to leave the group with high borrowing costs.
After a weekend filled with speculation, the agreement will give Colombian billionaire Jaime Gilinski Bacal the control of Metro. The bank’s advisors were scrambling to come up with a deal before the financial markets opened this morning.
The Bank of England’s Prudential Regulation Authority closely monitored these negotiations and said yesterday it was pleased with the measures taken by Metro to “strengthen its capital position”.
The deal is not without cost, both for the bank and the investors.
The equity raising of £150 million, priced at 30p per share, will result in a significant diluting effect on shareholders. This is a substantial discount from the 45 1/4p price at which the stock ended last week.
Gilinski Bacal is the largest contributor to equity, with Spaldy Investments contributing £102million. Spaldy will now have a stake of about 53%, up from its current 9.2%. Metro’s share market value, which is around £70million, also pales in comparison.
The deal includes £175,000,000 of new debt and refinances £600,000,000 of outstanding borrowings. This will result in a haircut for some bondholders of at least 40%. Metro will have to pay high interest rates as part of the refinancing. The coupons on some debts are expected to rise to painfully high levels of 14 and 12 percent.
The PRA approached several rival banks in order to gauge their interest in buying Metro. JPMorgan Chase in America, which operates a consumer bank in Britain, was not interested in buying the entire lender. Some players, such as NatWest, Lloyds Banking Group, and Santander UK are thought to be interested. Metro confirmed last night that it is in discussions about selling its residential mortgage portfolio, which could be worth up to £3 billion.
Metro opened its very first branch in 2010, with the lofty goal of shaking up the UK banking industry.
Metro was founded by Vernon Hill and Anthony Thomson. Hill is an American entrepreneur. They wanted to compete with the large high-street lenders who have long controlled the UK market.
Metro’s plans were put into chaos in 2019 after it revealed that it had made a mistake with its accounting, which resulted in it not having enough capital.
While Dan Frumkin has been Metro’s CEO since 2020 and has attempted to revive the lender after that debacle his efforts were dealt a serious blow by the PRA’s decision to refuse Metro’s attempt to reduce the amount of capital it must hold on its residential mortgage book.
Metro’s PRA stance was revealed last month. This sparked a drop in its share price, fueling concerns over the lender’s financial position. Investors’ concerns were further heightened last Wednesday, when Metro announced that it was looking for hundreds of millions in equity and debt.
Frumkin stated that the deal “marks an exciting new chapter for Metro Bank and will enable the bank to continue its profitable growth in the years ahead”.
Gilinski said: “I am an active investor at Metro Bank.” I am motivated to be the Bank’s largest shareholder by my belief that physical and digital banking are essential, underpinned by an emphasis on exceptional customer service.
Metro Bank shares jumped 20 percent in early trading. They went up 9 1/2p, to 54 1/2p. Shares of Metro Bank, which were floated in 2016 at £20 per share, rose to £40 by 2018 but have since fallen around 98 percent.