Metro Bank

[Eddiedcricket123]

Interesting read thank you.

The idea is that Metro Bank management wanted to change to an internal credit rating based model (AIRB), to internally calculate their own RWAs (RIsk-Weighted Assets). They are using a Standardized approach, which has the effect of an increased RWA exposure, which means that the capital required (CET 1 capital) and other cyclical buffers will be increased. This then gives Metro less internal capital to lend out, and is in effect, dead money. By using the AIRB, they would have as a result lower RWAs and free up more capital. And ofcourse, the other issue is the bank's ability to raise capital externally, which they are v limited to right now. And even to raise more internally which they have a serious challenge doing that anyway...

[BondSquared]

Interesting read thank you.

The idea is that Metro Bank management wanted to change to an internal credit rating based model (AIRB), to internally calculate their own RWAs (RIsk-Weighted Assets). They are using a Standardized approach, which has the effect of an increased RWA exposure, which means that the capital required (CET 1 capital) and other cyclical buffers will be increased. This then gives Metro less internal capital to lend out, and is in effect, dead money. By using the AIRB, they would have as a result lower RWAs and free up more capital. And ofcourse, the other issue is the bank's ability to raise capital externally, which they are v limited to right now. And even to raise more internally which they have a serious challenge doing that anyway...

Indeed. The management is betting the bank on the AIRB model approval. And let's not forget that they couldn't even calculate the standardised risk weights correctly (and got fined for that: https://www.bankofengland.co.uk/-/media ... o-bank.pdf), and now they're betting on getting approval for the advanced approach? If it doesn't arrive then it's likely lights out, or at least the market is already thinking so - the senior non-pref 2025 bond is trading at yields around 27%.

Not sure if I want to be invested in a bank whose CEO states they're in a tennis match / battle with their supervisor.

[88V8]

The ords seem to be in a death spiral. 50p and no apparent bottom.
Opportunity to top up, or falling knife.
Shame about the 5.5s, seemed a good idea once.

Quote from elsewhere ...they need to raise money and they struggled with this when interest rates were much lower. Couple that with high loan to value on their mortgage book with a falling housing market and rising costs...

Guess that about covers it.

V8

[BondSquared]

The ords seem to be in a death spiral. 50p and no apparent bottom.
Opportunity to top up, or falling knife.
Shame about the 5.5s, seemed a good idea once.

Quote from elsewhere ...they need to raise money and they struggled with this when interest rates were much lower. Couple that with high loan to value on their mortgage book with a falling housing market and rising costs...

Guess that about covers it.

V8

Market cap is now £89mm, down from £3.6bn in 2018 (i.e. down ~98% from high). Mind you, the CEO, who joined from "Bank of NT Butterfield & Son Bermuda", holds £1.5mm thereof.
Still happy to have sat that one out and spectating from the fence. Equally happy to see its fortunes being turned around, altough sceptical as to if it will happen - why would any White Knight want to come in and pay for the honour? More likely, the 5.5 bondholders would get burned.

Good luck - genuinely - to anyone invested across common/senior/T2.

[scrumpyjack]

I see that Hargreaves Lansdown now include Metro Bank in their Active Savings facility. The instant access MB via HL pays over 5% (and so I've put some money in there, but well under the £85k guarantee), but their own website only gives a rate of 1.65% for an instant access savings account.

Another indication they are getting desperate?

[88V8]

And now rumours of raising more capital.

Will ords be helped or diluted.. where will the 5.5s sit in a boosted stack...

V8

[hiriskpaul]

And now rumours of raising more capital.

Will ords be helped or diluted.. where will the 5.5s sit in a boosted stack...

V8

The article is inaccurate in that the senior MREL debt does not need to be replaced until 2025 and may not need replacing at all of course if they sort out their capital. The subs, also MREL, are OK for another 5 years, but it's T2 status has started being amortised away, so they really do need to sort out their capital. This has become more urgent now that their AIRB model approval has been delayed.

Massive dilutory rights likely coming, possibly with subs bail in if they can get bondholders to agree. I would have thought bondholders would resist that though as the bank is solvent and profitable, so a better outcome for bondholders might well be achieved by Metro shutting up shop and liquidating their assets.

I still hold the 5.5s, now 9.139% after the coupon step up and am not rushing to exit at current prices of around 52. Vanquis expiry next week, so I might consider buying a few more!

ps I invested in the Ratesetter/Metro 4.95% deposit for a relative. I note the maximum allowed was £85k.

[hiriskpaul]

And now rumours of raising more capital.

Will ords be helped or diluted.. where will the 5.5s sit in a boosted stack...

V8

The article is inaccurate in that the senior MREL debt does not need to be replaced until 2025 and may not need replacing at all of course if they sort out their capital. The subs, also MREL, are OK for another 5 years, but it's T2 status has started being amortised away, so they really do need to sort out their capital. This has become more urgent now that their AIRB model approval has been delayed.

Whoops, I was wrong about the senior unsecured and the article correct. Although the 9.5% senior matures in 2025 it is only MREL eligible until 2024.

[BondSquared]

Looks like the end game is on:

10/05/2023 09:27:13 [BN] Bloomberg News
Metro Bank Bonds, Stock Tumble as Lender Seeks to Raise Capital
By Tom Metcalf and Tasos Vossos
Metro Bank Holdings Plc shares and bonds tumbled Thursday as the lender confirmed it is
exploring a potential capital raise.
A £250 million bond that provides tier 2 capital to the bank fell more than four pence on the pound to almost 50
pence, marking its biggest drop in a year. A £350 million senior bond fell 1.3 pence to 69 pence, hitting a record
low, based on prices compiled by Bloomberg. Shares in the lender were down almost 25% at 9:22 a.m. in London.
It’s less than a month since the last price slump, when Metro Bank suffered a setback in its attempt to get regulatory
approval for changes that would allow it to reduce the capital it’s required to hold.
The lender said in a statement Thursday that it was “evaluating the merits of a range of options, including a
combination of equity issuance, debt issuance and /or refinancing and asset sales,” confirming an earlier Bloomberg
News report. It said no decision had been made on whether to proceed with any of these options.
The bank noted it has been profitable on an underlying basis for three consecutive quarters ending June 30 and it
expects its third quarter trading update to show continued momentum.
“We suspect that some form of ‘friends and family’ transaction targeted at existing equity / debt investors would be
the most likely prospect,” Edward Firth, an analyst at KBW, said in a note.
The company, which has hired Morgan Stanley to advise it on its options, had £22 billion ($26.6 billion) of total
assets at the end of June. It currently has a market value of about £65 million, compared with £3.2 billion at the end
of 2017. Its total short and long-term debt amounted to £4.9 billion at the end of 2022, based on data compiled
by Bloomberg.

[BondSquared]

Looks like the end game is on:

10/05/2023 09:27:13 [BN] Bloomberg News
Metro Bank Bonds, Stock Tumble as Lender Seeks to Raise Capital
By Tom Metcalf and Tasos Vossos
Metro Bank Holdings Plc shares and bonds tumbled Thursday as the lender confirmed it is
exploring a potential capital raise.
A £250 million bond that provides tier 2 capital to the bank fell more than four pence on the pound to almost 50
pence, marking its biggest drop in a year. A £350 million senior bond fell 1.3 pence to 69 pence, hitting a record
low, based on prices compiled by Bloomberg. Shares in the lender were down almost 25% at 9:22 a.m. in London.
It’s less than a month since the last price slump, when Metro Bank suffered a setback in its attempt to get regulatory
approval for changes that would allow it to reduce the capital it’s required to hold.
The lender said in a statement Thursday that it was “evaluating the merits of a range of options, including a
combination of equity issuance, debt issuance and /or refinancing and asset sales,” confirming an earlier Bloomberg
News report. It said no decision had been made on whether to proceed with any of these options.
The bank noted it has been profitable on an underlying basis for three consecutive quarters ending June 30 and it
expects its third quarter trading update to show continued momentum.
“We suspect that some form of ‘friends and family’ transaction targeted at existing equity / debt investors would be
the most likely prospect,” Edward Firth, an analyst at KBW, said in a note.
The company, which has hired Morgan Stanley to advise it on its options, had £22 billion ($26.6 billion) of total
assets at the end of June. It currently has a market value of about £65 million, compared with £3.2 billion at the end
of 2017. Its total short and long-term debt amounted to £4.9 billion at the end of 2022, based on data compiled
by Bloomberg.

The T2 (formerly 5.5, now 9.139] bond is now quoted at 37 mid

[Swanmore22]

Getting interesting.Been on the cards for some time and it has spewed out into the media today.
Management are now forced to act, and hopefully, they will find support from existing shareholders
Badly handled approach to switch to AIRB modelling
Would have been better to tap existing shareholders first at deep discount and then make approach.Maybe they did ?
Am holding the 9.13%s and will wait and see

Good luck all,

Swan

[hiriskpaul]

Yes, it looks as though management will have to take action soon. Profits are insufficient to resolve the capital problem with uncertainty over AIRB. The more time that passes the more it looks like they will be unable to refinance the senior debt at a price that would make sense. It would be great if shareholders stumped up what was required, but I think it a long shot that will happen. Another option might be some deal with bondholders, but taking a haircut I think would likely be resisted without wiping out shareholders first and there does not seem any reason at present to do that. That could change of course. ISTM then that the most likely course is a reduction in RWA, probably mortgages. That in itself is undesirable as it will impair profits, but it is looking like there will not be many other options. They need to shrink the balance sheet.

[Swanmore22]

Paul,

As you point out, balance sheet reduction is the immediate and viable option and is what what the regulators will push for.


FT reports :"The bank is also considering selling about £2.3bn of its £7.5bn mortgage book to raise funds and reduce its regulatory capital requirements, according to people familiar with the matter."

Will reducing the loan book be enough to to avoid a new bond issue ?
Can only wait and see,

Swan

In the old days , the BOE would be steering Metro into the arms of Nationwide or Santander , just like it married Midland with HSBC after the Saatchi Bros launched a bid.
Unfortunately, Andrew Bailey is not the man for this.

[hiriskpaul]

Paul,

As you point out, balance sheet reduction is the immediate and viable option and is what what the regulators will push for.


FT reports :"The bank is also considering selling about £2.3bn of its £7.5bn mortgage book to raise funds and reduce its regulatory capital requirements, according to people familiar with the matter."

Will reducing the loan book be enough to to avoid a new bond issue ?
Can only wait and see,

Swan

In the old days , the BOE would be steering Metro into the arms of Nationwide or Santander , just like it married Midland with HSBC after the Saatchi Bros launched a bid.
Unfortunately, Andrew Bailey is not the man for this.

I am guessing that they have calculated that a £2.3B reduction of assets would be enough. On Wednesday the FT reported that Metro were looking to raise £250m equity and £350m debt. The debt is to replace the senior unsecured. I would expect Metro to have worked out that £250m in equity is sufficient to then rollover the £350m at reasonable cost. A £2.3B reduction in productive assets would of course eat into profits so they would much prefer the equity raise.

[BondSquared]

All of this is assuming that Metro Bank would be able to offload these mortgages at book value (or above), including interest rate hedges (or lack thereof). Why would anyone, in a fire sale in a darkening economic environment and rising rates (gilts reaching new lows today) take off their mortgages at par value with zero discount? Who wants to take on mortgages with a few years of fixed rates which are well below market rates unless they're fully hedged (which I very much doubt)?

As soon as they sell at a discount, Metro Bank would realise losses, eating away into their capital base, so it would be a question of how much capital they free up from reducing RWAs vs how much capital they destroy in the process by selling them below book value.

Looking at the management's track record and competence I wouldn't be too confident.

Imv, they need to bail in (via PRA statuatory power) at a minimum the T2s, if not the seniors, too.

[88V8]

Imv, they need to bail in (via PRA statuatory power) at a minimum the T2s, if not the seniors, too.

If they did that without burning the ords, that would put the cat among the pigeons.

V8

[BondSquared]

Imv, they need to bail in (via PRA statuatory power) at a minimum the T2s, if not the seniors, too.

If they did that without burning the ords, that would put the cat among the pigeons.

V8

I assumed the ords to be toast(ed) anyway but didn't mention them as they cannot be bailed in (they cannot generate any new capital as they already are CET1). Although - never assume the creditor ranking to be respected, ask any CS AT1 holder ... Note that the PRA already used statuatory powers in 2023 to wipe out an instrument that hadn't been triggered by its contractual terms - SVB UK AT1s.

[88V8]

If they did that without burning the ords, that would put the cat among the pigeons.

I assumed the ords to be toast(ed) anyway but didn't mention them as they cannot be bailed in (they cannot generate any new capital as they already are CET1). Although - never assume the creditor ranking to be respected, ask any CS AT1 holder ... Note that the PRA already used statuatory powers in 2023 to wipe out an instrument that hadn't been triggered by its contractual terms - SVB UK AT1s.

Yes, but they were bust, and Metro currently aren't.

V8

[BondSquared]

I assumed the ords to be toast(ed) anyway but didn't mention them as they cannot be bailed in (they cannot generate any new capital as they already are CET1). Although - never assume the creditor ranking to be respected, ask any CS AT1 holder ... Note that the PRA already used statuatory powers in 2023 to wipe out an instrument that hadn't been triggered by its contractual terms - SVB UK AT1s.

Yes, but they were bust, and Metro currently aren't.

V8

Not really - SVB UK didn't go bust, it was a case of solvent transfer (to HSBC) without any hard fail (bankruptcy or similar) but still with a forced AT1 bail-in (the AT1s didn't contractually trigger, the PRA just came in and wrote them down). https://www.bankofengland.co.uk/explain ... ey-bank-uk
That would be my expectation for Metro Bank now. Something needs to happen over the weekend - once the weekend papers come out with Metro Bank headlines, customers will fire up their online banking app, and the rest goes rather quickly in the digital age.

[Mike4]

I assumed the ords to be toast(ed) anyway but didn't mention them as they cannot be bailed in (they cannot generate any new capital as they already are CET1). Although - never assume the creditor ranking to be respected, ask any CS AT1 holder ... Note that the PRA already used statuatory powers in 2023 to wipe out an instrument that hadn't been triggered by its contractual terms - SVB UK AT1s.

Yes, but they were bust, and Metro currently aren't.

V8

I'm puzzled why not.

When RBS were (bizarrely) offering me lots of £k to take my business account elsewhere I eventually took the bait and moved it to Starling Bank. But prior to that I visited the Metro Bank branch in Newbury to enquire about opening a business account there. It was full of staff with DILLIGAF faces on and I was told to come back at a time not Friday at 4pm. Stupidly I went back at 11.00am the next Monday to be told I'd need to make an appointment and someone would call me. Never got the call and the impression I gained was I was all too much trouble. So I had a look on the Starling site and opened a new Business Account in about ten minutes flat using just my phone whilst sitting comfortably in the sun on my boat.

Now why couldn't Metro do that? Why have they not already gone bust with such a hostile and unhelpful attitude to potential new customers?