Once the darling of investors and analysts alike, Metro Bank (LSE: MTRO) has arguably seen nothing but bad news since it was forced to announce a serious accounting error earlier this year that brought about the need for an additional £350m in funding.
This week the so-called challenger bank took another hit after it pulled out of a £200m bond sale. This debt issuance was needed to meet new EU regulations known as MREL, which the bank will need to comply with by the end of the year. The regulations are designed to remove the need for government bailouts in the event of bank failures.
Metro’s share price tanked 30% on the news, but it may still not be a bargain.
Nobody buying
Despite Metro Bank offering a 7.5% yield on the prospective bonds, the company only received about £175m in orders by mid-afternoon Monday – far short of the £200–£250m it was hoping to see.
Though the debt and equity markets are subject to many different influences, I find it worrying when a company can’t find potential investors for its bonds – in theory, safer securities than shares – particularly at such a high yield.
Of course, the truth is that many people, on both the debt and equity sides of the market, think there is just too high a risk of the bank going bust. It is hard to imagine now, but Metro stock was £40 a share in early 2018. They are now about £1.80 – a 95% decline.
One needs to be careful about not falling into the fallacy of thinking that the price can’t fall further. A further 95% decline would see the stock at 9p per share, which would be twice as high as that other struggling firm, Sirius Minerals.
Management still positive
Despite this poor bond sale, Metro’s management still seems positive. Advisers to the bank have said that improved Q3 results and greater certainty surrounding Brexit means they may come back to the market toward the end of the year.
For shareholders and potential investors, however, a successful bond issuance may be no more beneficial than an unsuccessful one. A 7.5% yield is a very large debt burden for the bank to take on. Earlier this year it issued £375m of new shares, but still needs to issue debt in order to meet the MREL requirements.
Given Metro’s large customer base, it is possible that the Bank of England would be lenient with the deadline, giving the bank a little leeway. However, that would only delay, not remove Metro’s fundamental problem.
Short sellers have been betting against the bank for a while. The simple truth may be that despite customer support for challenger banks, the nature of the financial industry – particularly in a post-credit crunch world – may make it almost impossible for smaller firms to operate successfully in the long run.
It’s hard to see a scenario in which the Metro Bank share price reaches its previous highs. A sale to a bigger player is certainly possible, and could make some investors a little money, but at the moment this one just seems far too risky.
