By Iain Withers
LONDON (Reuters) -Shares in Metro Bank jumped in early trading on Monday, after the embattled British lender struck a fundraising deal overnight to bolster its balance sheet following urgent weekend talks in the wake of volatile trading.
Metro announced a 325-million-pound ($396-million) capital raising exercise and a 600-million-pound debt refinancing on Sunday, in a deal that would hand majority shareholder control to its biggest investor, Colombian billionaire Jaime Gilinski.
Gary Greenwood, banking analyst at Shore Capital, said the deal appeared to secure the bank's immediate future, but represented "a very painful rescue" as it entailed a hit for both shareholders and bondholders.
Metro Bank shares were up 26% at 56.9 pence by 0800 GMT.
Metro launched in 2010 to challenge the dominance of Britain's big banks but hit a string of setbacks in recent years, such as accounting errors, leadership departures and delayed regulatory approval for key capital reliefs.
The bank's stock whipsawed last week on reports that it was trying to raise about 600 million pounds, with the lender later confirming it was exploring its options.
Metro's principal regulator, the Bank of England's Prudential Regulation Authority (PRA), approached a number of major banks last week including Lloyds (LON:LLOY) and HSBC to consider takeover offers for the bank.
The PRA welcomed Metro's fundraising deal on Sunday.
As part of the deal, Metro has agreed to a capital raise comprising 150 million pounds of new equity and a 175-million-pound issuance of bail-in debt known as "MREL".
The equity raise was led by Metro's largest shareholder, Gilinski-owned Spaldy Investments, which contributed 102 million pounds. Spaldy will become the controlling shareholder once the transaction is completed, Metro said, with a stake of 53%.
The shares in the equity raise will be priced at 30 pence per share, or a discount to Friday's closing price of 45 pence.
Bondholders will also face a hit - with holders of a 250-million-pound Tier-2 bond taking a haircut of 40% - before switching into higher interest-paying bonds.
In a note, John Cronin, banking analyst at Goodbody, said while there was "the feel of a deal", the bank's backers still had to grant approval and he expected some resistance.
"As things currently stand, Metro shareholders will suffer material dilution and the bondholders are taking a deep haircut."
Metro shares remain around 97% down from when it first listed on the London stock exchange in 2016 at 20 pounds a share.
($1=0.8199 pounds)