Shares in financially-challenged lender Metro Bank (MTRO) jumped 25% to 57p after the firm announced it had secured an agreement for a significant cash injection including £150 million of new equity capital.

Investors chased the stock higher in the hope today’s news will secure its immediate future and go some way to derisking the bank after the shares hit an all-time low of 34p last week.

NEW MAJORITY SHAREHOLDER

The £150 million equity raise, which is smaller than the £250 million figure suggested last week by the Financial Times, is priced at 30p per share and will be led by Spaldy Investments which is contributing £102 million.

Spaldy, which is controlled by Colombian billionaire Jaime Gilinski Bacal, is already Metro’s largest shareholder and will have a controlling interest of 53% after the cash injection.

The bank is also issuing £175 million of new senior MREL (Minimum Requirement for own funds and Eligible Liabilities) securities due in April 2029 which extends the maturity of its funding.

Finally, the bank has secured £600 million of debt refinancing which removes worries over how it was going to repay the £350 million of fixed-rate debt which was due in October 2025.

Alongside these deals, Metro is in talks to sell up to £3 billion of residential mortgages and reinvest the proceeds at a higher yield.

The bank said the refinancing and asset sales would put it in a strong position to accelerate earnings growth. Metro Bank is expected to deliver a return on tangible equity in excess of 9% in 2025 and low double-digit to mid-teens thereafter over the medium term.

WHAT DO ANALYSTS THINK?

Russ Mould, investment director at AJ Bell, commented: ‘Another crisis in the banking sector has been averted… for now. Metro Bank’s fundraising agreement is important on two counts. First, it avoids any panic and a run on the bank, something that could have feasibly happened if it had not raised a significant amount of cash over the weekend to shore up its balance sheet. Second, it provides breathing space for the company to conclude talks on asset sales.’

‘The fundraising removes a lot of the risks, yet existing shareholders who do not participate in the equity raise will suffer significant dilution. Bondholders also get a big haircut’, added Mould.

Shore Capital banking analyst Gary Greenwood called the bail-out package ‘a very painful rescue’ for existing shareholders who unless they are willing or able to throw more money at the bank will see their investment diluted by around two-thirds.

‘In addition to pain for existing equity holders, there is also pain for existing bondholders with the debt refinancing resulting in a 40% haircut on the £250m of outstanding Tier 2 bonds,’ flags Greenwood.

This is important, says the analyst, as it ‘disrupts the normal order of seniority with bondholders taking a hit before equity holders have been completely written down, thus echoing the Credit Suisse rescue where AT1 holders were written off entirely while equity holders partially survived’.

‘This was no doubt a condition of Spaldy’s agreement to support the rescue but is nonetheless concerning for bond investors in bank debt,’ concludes Greenwood.

LEARN MORE ABOUT METRO BANK

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Daniel Coatsworth own shares in AJ Bell.

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