Successful banks typically prefer to avoid negative press and speculation. On that basis, Metro Bank has not had a successful year.
The bank, like other UK ‘challenger banks’, continues to face significant headwinds from the very competitive landscape, the low interest rate environment, Brexit uncertainty and much higher regulatory costs, especially around the amount of capital and “bail-inable” debt that banks are required to hold since the financial crisis.
Unlike its peers, Metro Bank has also been in the news for its own failings, from risk and accounting controls to governance issues, and as recently as last week a botched attempt to come to the market to issue “bail-inable” MREL (Minimum Requirement for Own Funds & Eligible Liabilities) debt instruments.
The bank came back to the market yesterday, and this time successfully issued £350m of senior non-preferred instruments at 9.5%. The very high coupon, as well as its structure to allow US investors to participate and the longer tenor, helped attract around £550m of interest from the debt market, with the bonds trading up around the 101.5-102.0 level.
Whilst Metro Bank’s management team will be relieved to have met its upcoming regulatory requirements, questions will remain around the sustainability of its business model. The new debt transaction – and the £33.25m annual interest cost attached to it – will have a material negative impact on the bank’s profitability metrics, and likely their medium term strategic direction.
Whilst Metro Bank share price has now partially retraced the move related to its failed debt issuance, there should be no doubt that there has just been, yet again, a material transfer of value between stakeholders. Shareholders are picking up the tab to the benefit of debtholders and, ultimately, regulators.
Kames holds bonds from Metro Bank in its fund range