Metro Bank shares plunged more than 35% to a record low on Tuesday after wary investors refused to purchase its bonds, in another blow to the bank since it revealed an accounting error in January.
The bond sale was launched on Monday morning but the bank announced after markets closed that it had cancelled the sale by the afternoon after failing to drum up enough interest to reach its £200m-£250m sales target. That was despite trying to tempt buyers with an interest rate of 7.5%, which is high for a European bank.
The Guardian understands that Metro had only attracted £175m worth of orders, prompting it to pull the plug.
The decision to abandon the bond sale sent shares down 35% to 175p on Tuesday, with trading volumes nearly double those on Monday. Metro Bank shares have lost nearly 90% of their value so far this year.
Russ Mould, the investment director of AJ Bell, said: “The cancellation of a £200m bond sale is another major blow to Metro Bank, leaving management with red faces and the shares sinking even further.
“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market. It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”
Metro Bank, which reported 1.8 million customer accounts in July, insisted it was in a strong position, and said it had cancelled the sale because of tough market conditions.
Metro’s borrowing costs have soared since January, when it revealed it had misclassified £900m worth of loans as being less risky than they actually were. The discovery meant the bank had a smaller capital cushion to protect it from a larger pool of risky loans in the event of a downturn. It prompted an investigation by financial regulators, which was widened recently to include Metro Bank’s senior managers. That investigation is continuing.
Monday’s bond sale was part of the bank’s efforts to meet EU regulatory requirements by the end of 2019, which would help it wind down effectively in a crisis without using taxpayer cash.
If Metro Bank fails to conduct a successful sale in the coming months, it may be forced to ask the Bank of England to postpone its year-end deadline to meet its so-called minimum requirement for own funds and eligible liabilities (MREL).
John Cronin, a financial analyst at the stockbroker Goodbody, said there were a number of risks that had deterred bond investors from taking part in Monday’s sale.
He said investors were concerned that the financial regulator the Prudential Regulation Authority could raise its capital requirements, in order to provide a larger cushion against Metro Bank’s risky assets following the accounting scandal.
Cronin also pointed to existing lawsuits over the accounting issue, and said further legal action could be on the cards, which could affect Metro’s finances.
“Furthermore, given the uncertainties surrounding the macroeconomic backdrop and, more particularly, the outlook for [interest] rates, there are real concerns regarding the ability of Metro Bank to generate profits,” Cronin added.
Citi analysts said Metro actually needed to issue £1bn worth of debt – £500m in 2019 and the same amount in 2020 – in order to meet its requirements, assuming Citi’s growth forecasts for Metro stay on track.
Citi said Metro could consider selling a portion of its mortgage business to meet the regulatory requirements, but that move risks putting further strain on Metro’s earnings.
A takeover may be more likely, but it is not clear who might be poised to snap up the high street lender.
“The best owner for Metro would be a strategic buyer, but we struggle to identify obvious candidates,” Citi analysts added.
Metro Bank is already on the hunt for candidates to replace its chairman, Vernon Hill, who founded the bank in 2010, making it the first new bank to open on Britain’s high streets in over a century.
The company announced in July the 73-year old would be stepping down, at a time of shareholder pressure to overhaul its leadership. In May, Metro Bank announced it was severing links with the architecture firm owned by Hill’s wife, amid criticism over £25m worth of payments made by the lender to her business. Shareholders said the arrangement posed a conflict of interest.
