Relief appears to be the market’s immediate ‘emotional response’ to the news that Metro Bank Holdings PLC (LSE:MTRO) has received an equity and debt bail-out that stabilises the business.
After hitting a low of 37.5p on Friday amid fears it may suffer the same fate as Silicon Valley Bank (SVB), which in March was split up and taken over after hitting the buffers, Metro’s shares leapt 21% to 55.1p on Monday following the rescue.
However, according to Shore Capital, the lender still has a lot to prove to investors.
Can it deliver?
“Subject to the required shareholder approvals, Metro Bank now finds itself in a position where it can continue to trade,” the regional broker said in a note.
“However, whether it can ultimately deliver on its growth ambitions to leverage its expensive cost base and improve returns remains to be seen.”
Announced on Sunday, the deal comprises a £325 million capital raise, divided between £150 million in new equity from Metro's largest shareholders and £175 million in fresh debt from bondholders.
Colombian billionaire Jaime Gilinski Bacal, Metro's biggest shareholder, is slated to contribute £102 million to the new equity, positioning his investment company Spaldy to become the bank's majority shareholder.
Haircut
Financing arrangement also includes £600 million in debt refinancing, requiring Metro's Tier 2 bondholders to accept a 40-45% haircut on their investments.
As it looks to further bolster its balance sheet, the bank is in discussions to sell certain unspecified assets worth around £1 billion.
Metro Bank CEO Dan Frumkin said the refinancing package "marks a new chapter" for the institution. Gilinski Bacal echoed this sentiment, expressing confidence that the deal would enable Metro to pursue growth.
Analysts estimate existing shareholders, who are either unable or unwilling to participate in the equity raise, will see their holdings diluted by around two-thirds as a result of the rescue.
Painful decisions
Shore Capital called the process “very painful”, adding: “In the end, this may have been the only option for the group, with potential trade buyers of the business said (by the media) to have been concerned about the lack of time to perform proper due diligence and having a reluctance to take on the group’s expensive branches.”
According to Russ Mould, investment director at funds platform AJ Bell, Metro now has to make some tough decisions if it’s to survive as an independent entity.
“[It] needs to find a way to keep its clientele happy and still win new business, which is going to be a tough job,” he said.
“It is time for a radical rethink of how the company operates. A high-cost base is unsustainable, so something has to change.
“If not, Metro Bank might find itself gobbled up by a bigger company whose first job will be to shut down its expensive branch network.”