May 9, 2019 / 3:10 PM / 2 months ago

Metro Bank funding problems deepen as bondholder confidence wavers

* Confidence shaken by accounting error, pending rights issue

* As much as 1.5 bln stg new debt funding needed by end-2021

* Sales of risky assets would free up capital, support growth

* Shares tumble 11 percent to fresh all time low on Thursday

By Sinead Cruise and Iain Withers

LONDON, May 9 (Reuters) - Bondholders are urging Britain’s crisis-hit Metro Bank to accelerate its pursuit of a credit rating, seek new leadership and sell assets to win support in critical debt fundraisings this year and beyond.

With the status of a 350 million pounds ($455 million) share sale still unclear, sources at three fund firms holding Metro bonds said they shared stock holders concerns about the lender’s finances, slowing growth and corporate governance.

The unease among investors follows a bruising few months for Metro, which has seen valuable business borrowers flee in the wake of a major accounting error and more than 1.5 billion pounds slashed off its stock market value.

“There’s a fair bit of travelling and arriving that needs to happen here. has to issue more debt so it has to get itself into a more creditworthy shape,” Lloyd Harris, fund manager at Merian Global Investors, told Reuters.

“People haven’t got the comfort of being able to read the credit agency report. They have to do their own work and right now, it’s difficult to convince some people when the CEO has tried to resign twice ... New leadership would certainly help from an investor perspective,” he said.

Metro declined to comment.

The yield on Metro’s unrated 250 million pound 10-year Tier 2 subordinated issue was trading at around 10.6 percent on Thursday, compared with around 4 percent at issue last June, reflecting the high risk premium demanded to hold the debt.

The sell-off echoes a 69 percent fall in the bank’s share price this year to date to an all-time low of 523 pence on Thursday.

Besides the rights issue, Metro also needs to issue as much as 1.5 billion pounds in debt between now and the end of 2021 to fund growth and meet regulatory MREL requirements - special debt banks are obliged to hold to absorb losses in a crisis.

Analysts at Barclays said upcoming issuance for Metro was likely to be “very expensive” unless funding markets eased significantly from current levels.

“Metro is a very challenged credit. I’m not sure they have market access at this point. There is a lot of investor distrust in their model, especially the issues around risk weighted assets,” a senior bank capital syndicate official said.

Some major investment firms including Fidelity International have cut exposure to Metro in recent weeks, while another source close to a second large fund firm said it was also looking to pare its holdings.

FUTURE HEADWINDS

Metro is seeking a rights issue to repair an unexpected dent in its common equity tier 1 (CET1) ratio after admitting it was more heavily exposed to higher risk mortgage assets than first disclosed.

Both analysts and investors have called on Metro to sell those assets to relieve pressure on its balance sheet.

“From an investor perspective, selling off the misclassified assets makes total sense. Those assets are now less economic than they were before,” Harris said.

The CET1 ratio, a closely-watched measure of financial strength, fell by 100 basis points to 12.1 percent following the disclosure, just shy of the bank’s minimum capital level and putting its capital-intensive expansion plans in jeopardy.

The lender has opened 67 branches across Britain in the nine years since it was founded, while its biggest competitors Royal Bank of Scotland and Lloyds Banking Group have slashed their number of outlets.

Speaking after the bank’s first quarter results, Chief Executive Craig Donaldson told Reuters he was confident Metro would secure the equity fundraising “in the second quarter,” but gave no details on price.

However, analysts and industry sources said the underwriting banks Jefferies, KBW and RBC might be dragging their feet on the process pending greater stability in the share price.

RBC declined to comment, while KBW and Jefferies did not respond to a request for comment.

Analysts at Goodbody have estimated a rights issue price at the lower end of a 400-500 pence range, with “further material downward pressure” for the shares over time.

Shareholder advisory group ISS said on Thursday it had recommended investors block Metro’s pay report and abstain on other key votes in the bank’s upcoming shareholder meeting, including the re-election of the bank’s chairman and CEO. ($1 = 0.7686 pounds)

Additional reporting by Abhinav Ramnarayan and Lawrence White; Editing by Mark Potter

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below