Is the ECB ready to buy corporate debt?

IFR 2056 25 October to 31 October 2014
6 min read
EMEA
Philip Wright

“Buy the rumour, sell the fact” goes the old market adage. But for anyone basing their trading strategy on the machinations of the European Central Bank, these are highly confusing times.

This much is known: the ECB embarked on its buying programme targeting covered bonds last Monday and is set to extend this to ABS later in the year, with up to €1trn of firepower at its disposal. This had long been expected, with spreads tightening in the run-up to implementation.

But as is often the case when the ECB is involved, it did not take long before further whispers began to emerge, this time regarding the potential for adding corporate debt into the mix. The talk is that a decision to do so is possible as soon as December, with purchases to begin early next year.

Predictably, the credit markets rallied on the “news”, with the iTraxx Main and Crossover indices ratcheting in 8%–10% as the prospect of even lower spreads was digested.

True to form, there were doubting voices, and certainly no official confirmation – if anything, the bias leant the other way, with governing council members saying there were no concrete plans.

But the genie is out of the bottle. And even if it transpires to be nothing more than a collective hallucination, the seeds of doubt have been sown in the minds of those who think a moribund eurozone economy could lead to pressure on corporates’ earning capabilities – and that spreads are therefore compressed enough already.

Busy doing nothing

And perhaps herein lies the point. After all, the ECB has enjoyed previous success based on what it has said it intends to do rather than the implementation itself.

Back in the darker days of 2009, it announced a €60bn covered bond purchase programme that breathed life into what had become a stagnant sector, with the first signs of revival coming before the bank had spent a cent. A second programme 2-1/2 years later (CBPP2) was less successful, although it was less clear what it was designed to achieve, given that the asset class was not at that time in the doldrums.

It remains to be seen what the results of CBPP3 will be, although spreads again tightened in anticipation. And so they could with corporates – and to a degree already have.

“In my opinion, any ECB corporate bond purchasing programme would be supportive for spreads, even if they just talked a lot and purchased very little,” said Gary Jenkins, chief credit strategist at LNG Capital.

Which leads to the question of just how much stock there is available for it to target.

The ECB’s balance sheet currently stands at around the €2trn mark and the aim is to increase this to the €3trn last seen in early 2012.

Barclays’ analysts estimate there is about €495bn in par value of unsecured senior non-financial debt outstanding from eurozone issuers (€563bn in market value), based on the iBoxx Euro Corporate Index, There is also a similar amount of high-yield paper, although views are that investment-grade securities would be targeted, in much the same way that the Bank of England undertook its Asset Purchase Facility in 2009.

“Our advice – don’t do it. The corporate bond market doesn’t need fixing”

But the APF does not necessarily offer a blueprint. As RBS analyst Alberto Gallo pointed out, from when the BoE started buying sterling corporate bonds in March 2009 until it stopped in November 2012, it purchased just £2.1bn in nominal terms.

“Its total holdings reached just over £1.5bn at the peaks in late 2009 and mid-2010, or 0.6% of the market size,” he said.

The ECB would probably have to buy more than €100bn of corporate paper to top up its covered bond and ABS purchases, the consensus aggregate estimate of which is €300bn, said Gallo.

Ready, aim – what at?

At the core of the “will they, won’t they” conundrum is what the goal might be.

“Corporates don’t have any issues with funding,” said one global DCM syndicate head. “Corporate issuance is up 10% in Europe, and the loan, Schuldschein and private placement markets are all functioning. But it depends what you want to achieve. If it’s a way to get money into the system, then maybe it’s something to consider.”

But it is questionable to what extent such a measure would underpin the smaller companies.

“It is unlikely to help stimulate credit flow into the SME sector directly as non-financial corporate debt is primarily issued by larger corporates in the eurozone,” wrote Deutsche Bank’s Abhishek Singhania in a research note.

Add to this the fact that the bulk of eurozone long-term corporate debt is issued by French and, to a lesser extent, German borrowers (47.7% and 13.2%, according to RBS) and there is also the matter of whether peripheral credits whose needs might be greater would benefit in any meaningful way.

If a corporate bond-buying programme does go ahead, it will not necessarily be good news for the bond markets.

“The very last thing we need is another marginal buyer of corporate bonds,” wrote Suki Mann, head of European credit strategy at UBS.

“The ECB putting its buying boots on would make a huge difference to secondary market liquidity (drain it even more), valuations (make them even richer) and returns (boost them for 2014, but depress them even more for 2015/16). Our advice – don’t do it. The corporate bond market doesn’t need fixing.”

Frankfurt skyline
Markit’s iTraxx Main (Series 22)