Metro Bank’s riskiest bonds rally following rescue deal

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By Robert Fofana

Metro Bank’s riskiest bonds rally following rescue deal
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In a turnaround from last month’s drop in bond values, Metro Bank’s most precarious bonds saw unprecedented gains this Monday. This surge followed a rescue deal that appraised them higher than their previous heavily discounted trading levels. The bank’s concerns about regulators not granting approval for using internal risk models for residential mortgages this year had previously led to a decrease in bond values and the loss of Tier 2 capital treatment for subordinated notes due in 2028.

The rescue deal involves a 40% writedown on Metro Bank’s £250 million Tier 2 notes. These will be replaced with higher-coupon bonds maturing six years later, ensuring most of the debt remains unimpaired. The bank is set to swap subordinated bonds for new ones due in 2034 with a 14% coupon rate.

Jaime Gilinski, the largest investor in Metro Bank, has committed to injecting fresh funds into the bank and increasing his stake to 53% as part of the rescue deal. The restructuring also includes extending the maturity of senior notes due in 2025 to 2028 with an increased coupon rate of 12%. In addition, Metro Bank will issue an additional £175 million of these new senior notes.

However, this rescue plan hinges on a key condition: Metro Bank must achieve a 75% acceptance rate by October 13 for its debt structure overhaul. If it fails to meet this threshold, the haircut will increase to 45% for subordinated notes and a new 5% one will be applied to senior bonds.

Earlier this year, Metro Bank skipped a call option on these risky notes. This decision led to the coupon resetting to 9.139%, further contributing to the precarious position of these bonds before the announcement of the rescue deal.

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