Hedge-fund manager Steven Cohen and Michael Bloomberg are among those ruing the day they bought the crushed shares of the UK bank touted as a “bargain.”
By Nick Corbishley, for WOLF STREET:
Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.
The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.
“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,” said Russ Mould, the investment director of AJ Bell. “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 opened for business in 2010, becoming Britain’s first new high street bank in over 100 years. One of a handful of so-called “Challenger Banks” — new retail lenders created after the crisis to provide a little more banking competition in a country where the five biggest banks control a staggering 85% of the market — Metro Bank proved particularly adept at luring disillusioned clients from the big banks.
A large part of its attraction was its focus on physical branches while the big boys were frantically closing theirs. It grew faster than any other high street bank while picking up accolades for its customer satisfaction along the way.
But that was before a misreporting scandal in January this year decimated investor confidence in the bank. Investors — led perhaps by well-connected insiders — had already been smelling a rat since March 2018. From March 2018 until just before the initial disclosure on January 22, 2019, shares got whacked down in bits and pieces by 45%. Upon the disclosure, shares plunged. And they have gotten crushed every step along the way since then. As of today, they’re down 95% from March 2018, and the sell-off over the past few days reduced the shares from nearly nothing to almost nothing, from 288 pence to 192 pence, giving it market capitalization of just £332 million:
Metro blamed this week’s failed bond sale on tough market conditions. To a certain extent, it has a point: selling unsecured bank bonds just a month before another Brexit deadline is hardly ideal. Bank of Ireland was already forced to cancel a £300 million bond in early September due to the low level of demand; and luxury automaker Aston Martin — which S&P downgraded to deep-junk CCC+ over concerns about its ability to service its big pile of debts debts — had to offer interest rates as high as 12% to convince investors to buy $150 million of bonds due in 2022.
Most of Metro’s problems have been self-inflicted. By assigning a lower risk weight to its mortgage lending portfolio, whether by accident or intentionally, Metro left investors thinking it was safer than it actually is. Once trust is broken, it’s hard to win it back. Flagged up by regulators in January, the “error” left a gaping £900 million hole on its balance sheet, prompting managers to announce plans for a £350 million rights issue. The cash call was successful at 500 pence a share.
But the sell-off continued, leaving some very rich investors, including hedge fund manager Steven Cohen and Bloomberg-founder Michael Bloomberg, nursing heavy losses after they bagged shares at 500 pence during the cash call in May, which had been touted as a “bargain.” And now they’re at 192 pence.
In May, Metro Bank suffered a mini-bank run at some of its London branches. Big business clients withdrew some £2 billion of deposits in the first half, though last week’s bond prospectus showed it recovered much of that over the summer. In July, the lender reported an 80% drop in pre-tax profits for the first half of 2019. Then, last week it disclosed that a Financial Conduct Authority investigation into the bank’s mis-categorization of risk-weighted assets had been widened to include “certain senior members of management”.
Now, it has a new problem on its hands: How to raise fresh capital by the end of the year without having to pay interest rates it can’t afford, just as markets are, by its own admission, getting tougher. It needs the money for two main reasons: First, to comply with the first stage of the so-called MREL (minimum requirement for own funds and eligible liabilities) directive; and second, to roll over the £3.8 billion it drew from the Bank of England’s Term Lending Scheme in 2016. The scheme was ostensibly intended to boost affordable loans to families and businesses.
The interest rate on those extra-cheap loans is around 0.25%. Given that Metro this week failed to raise more than £175 million of four-year senior non-preferred bonds, despite offering 7.5% interest, it’s evidently going to have its work cut out rolling over the loans it took out from the Bank of England. At the very least, it needs more time to get its finances in order. To do that, it will probably need to sell some of its more valuable assets, including part of its mortgage book, which will hit its profitability.
According to the Financial Times, speculation is already growing that Metro could end up being bought by one of its more established rivals. In the ultimate irony, the first British high street bank to be handed a license in over 100 years in the hope it would provide a little extra competition to the big five banks that dominate the sector, may end up being bought out by one of those big banks. By Nick Corbishley, for WOLF STREET.
Thomas Cook collapsed after a rescue deal fell through. China’s Fosun and other shareholders are toast. Creditors get to fight over the debris. Read… Thomas Cook Collapses, up to 600,000 Travelers Stranded in Hotel & Airline Chaos, Triggers “Biggest Peacetime Repatriation in UK History”
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Why don’t they just avail themselves of the 14-day bridge loans from generous their generous uncle…
In fact it’s really starting to feel like 2007 leading into 2008. And a lot of the loot did go overseas, as well as Canada. Perhaps this time it really is just a temporary blip; but aren’t they always, until they aren’t?
Headline from the “Wall Street on Parade” site:
“The Fed Is Offering $100 Billion a Day in Emergency Loans to Unnamed Banks and Congress Is Not Curious Enough to Hold a Hearing”
” … Because the New York Fed is not announcing which banks are drawing down the bulk of its loans, neither Congress nor the American people know if the money is flowing to U.S. banks or foreign bank subsidiaries in the U.S. Propping up troubled foreign banks is not what most Americans want their central bank to be doing.”
Slogan…57 years of meaningful banking…
Whatever meaningful that means now.
Usually a much larger bank will takes what’s left after it tanks.
Along with WeWork and Thomas Cook…CRE is going to crater in London.
“A large part of its attraction was its focus on physical branches…”
If I’m understanding this 18-month-long train wreck, what we had earlier in the week was:
1) a 900 pound hole in the balance sheet,
2) a failed 350 pound bond issue that raised 175 pounds
3) somewhere lurking in the immediate future is a 3.8B pound rollover
All this in a bank with a market cap of 330 pounds. Sounds like the game has been over for months, but somebody forgot to tell the regulators & bank. Imagine their surprise as these guys read about this in tomorrow’s papers!
Thanks for posting Chip. You asked if you hit the assessment right. You didn’t! I suspect you know that.
1 they plugged the £900m gap in May by selling loans at face value for £500m and raised £375m of equity. That equity raise was over subscribed and took 24 hrs.
2 the bond issue was £200-250m, not £350. They raised £175m in the morning. They pulled it as they felt they could come back after Oct results were announced.
3 the BOE Loan, which is small in comparison to what other banks have taken is effectively part of global QE. Most central banks have done something similar. There is not any sensible suggestion that the banks will be forced into early repayment or not allowed to roll over. If they were the global banking system would be in melt down. That applies to Metro and all the other banks too.
Hope this helps.
Thanks…all new news
Foolish investor, in Brexit Britain the bargain is you!
Wolf would really like you to comment on “Trump says we must de-list all chinese companys in USA exchanges”
I don’t see anybody touching this, especially ZH, who just wants to put Trump in favorable light.
Seems to be that de-listing chinese stocks would kill Goldman-Sacks for trillions giving that they have been floating all these deals on the USA exchanges.
https://finance.yahoo.com/news/1-trump-officials-weigh-limits-155703649.html
WhoOnFirst?
Look, it’s just a rumor of a discussion. I might mention it when I discuss the next batch of crashed-and-burned Chinese ADRs traded in the US. But I have no idea how the Administration wants to actually do this. The best thing would be to force the reporting rules that US companies have to follow onto US-listed Chinese companies, and if they trip, they get delisted.
Goldman Sachs
I know what a non-preferred bond is. I know what senior debt is. But I have absolutely no idea what a “senior non-preferred bond” is, perhaps because it sounds a whole lot like a contradiction in terms.
Italian and especially French banks have been issuing these fancy new bonds with enthusiasm lately but they don’t make any sense. Going by yields alone they seem to me like a (legal) sleight of hand to sell non-preferred bonds with senior yields, but perhaps I am reading too much in it.
After bond markets went absolutely nuts over the Summer after deluding themselves Draghi would flash his magic wand and turn lead in gold, reality is once again kicking in and yields in the junk market are spiking.
While a 0.21% increase in the ICE BofAML Euro High Yield Index in two weeks may sound like nothing it’s still a 7.8% increase, and comes in the usual environment of massive easing with absolutely no change in monetary policy in sight.
We still don’t know if junk bonds are in snapback mode or not, but the Summer vacation is clearly over. Those who waited for Draghi’s pixie dust to finish bamboozling investors are going to have to break the piggy bank while those who issued bonds during the Summer made out like bandits.
I’d like to say somebody is learning a valuable lesson here but what’s the point?
The fact Italian banks are involved should tell you everything you need to know about them aka “avoid them like the plague.”
Invest on USA treasure bonds instead, is much safer.
MC01,
My guess is that it’s something like a “contingent convertible bond” that converts to equity in case of trouble. Deutsche Bank and many other banks have issued CoCos to boost their regulatory capital. These CoCos can be “bailed in” when the bank runs into trouble, meaning they convert to equity when certain regulatory capital thresholds are breached. So they count as regulatory capital when they’re issued.
Metro Bank has to raise its regulatory capital. A normal bond wouldn’t help because it would just be a normal liability and would do nothing to raise regulatory capital. But issuing a bond that converts to equity in case of trouble would raise regulatory capital.
Thanks for the reply. It stirred me into motion to look into these “senior non-preferred bonds” (SNB from now on).
It turns out they are a very special kind of securities that was created by the EU (not the ECB) in 2018 by basically estending to the whole EU a French creation which, as most websites I have perused put it, is considered “ambigous”.
This is because SNB are securities, plain old boring bonds, and will not convert into anything. But, here is the extraordinary and confusing thing, SNB are in some sort of limbo as seniority goes, between senior and junior bonds.
I have found no mention of SNB being automatically convertible into equities (and in the bail-in order they are subordinate to senior bonds and even very large uninsured deposits) and they carry truly minuscule coupons: to give an example SNB issued by Santander and coming due in 2025 pay all of a massive 1.125% coupon.
As far as regulatory capital goes, European banks will be issuing about €200 billion of bonds from here to 2022 just to be compliant with new EU loss-absorption regulations (MREL and TLAC): this is a truly staggering amount and the European Banking Authority (EBA) has expressed serious doubts security markets can absorb that amount, at least at present yields.
As it often happens the left hand has no clue what the right one is doing…
“Metro Bank opened for business in 2010, becoming Britain’s first new high street bank in over 100 years. One of a handful of so-called “Challenger Banks”
No new entrants to the market allowed. Crushed under the weight of challenge to global power. What happened to the others in the handful?
Interesting what is being censored in comments Wolfstreet. Very telling.
Challenger,
This was your first comment here with this login because you change your login all the time. I have to manually approve all first-time commenters, which is how this is being treated. And you’re complaining about something being “censored” here. So read the guidelines because you need to know that this is NOT a free-for-all:
https://wolfstreet.com/2017/10/07/finally-my-guidelines-for-commenting/