woensdag 21 juni 2017

ECB Reveals That 15% Of Its Bond Purchases Directly Funded Companies

After several members of the European Parliament criticized the ECB for a lack of transparency surrounding its corporate bond buying, suggesting some companies could be favored over others, today the central bank with the €4.2 trillion balance sheet released a bulletin providing additional details for European lawmakers on its corporate sector purchase programme (CSPP). The highlights: the ECB now owns 952 securities amounting to €93.7 billion, or 14.1% of the total €664 billion outstanding, with the central bank adding that it is "well diversified over around 950 securities issued by around 200 issuer groups." The report states that the breakdown of CSPP holdings by country of risk follows that of the CSPP-eligible bond universe very closely, and that there aren't "any major deviations between CSPP holdings and their respective shares in the CSPP-eligible universe in terms of sectors of economic activity or rating groups"...


Looking at the country breakdown, French and German issuers continue to dominate the bond count, consisting of 494 issuances worth €363bn in amount outstanding. Bonds from non-Eurozone corporates were also on the list, mainly by Swiss issuers (32 issuances worth €24bn). At the sector level, Utilities remains the top pick (250 issuances worth €161bn), while non-cyclical consumers is a distant second (145 issuances, €110bn in amount outstanding). One key observation is that according to a separate analysis by UBS, the ECB now hold 229 bonds out of a total 952 (whose total notional outstanding is €664 billion), or 24%, which are rated BB+ or non-rated (NR), suggesting there may be a drift toward lower quality holdings, in effect making a quarter of the ECB's corporate balance sheet a "bad bank." Expect this number to grow as more European companies are downgraded and become fallen angels...


The ECB also admitted that 12% of corporate bonds holdings were purchased at negative yields. As of this moment, 85 (8.9%) of the 952 securities it owns are negative yielding. But the most striking observation is that, as the ECB reports, "purchases under the CSPP are made in both the primary and the secondary markets" and adds that since its inception "15% of CSPP holdings have been purchased in the primary market", in other words providing funds directly to companies, instead of merely transacting in the secondary market. Monthly net purchases during the period from June 2016 to May 2017 have ranged between just below €4 billion and just below €10 billion (see Chart B). Purchases were low ahead of the year-end, due to negligible bond issuance and low secondary market liquidity...


The central bank adds that "owing to these primary market purchases and to better liquidity in newly issued bonds, CSPP holdings tend to be skewed towards bonds issued more recently; more than half are in bonds issued in 2016 and 2017. This also explains the relentless squeeze tighter across IG and HY bonds in Europe, whose yields and spreads recently hit record tights. The ECB also reports Investor demand for CSPP-eligible corporate bond issuances was, on average, around three times higher than the issued amount"...


This is also known as directly funding companies, also known as "monetizing" debt, and while the ECB does not do that to sovereign debt (to the best of our knowledge) it clearly does so with corporate bonds. This means that the ECB has subsidized handed out billions to a subset of mostly unknown corporate bond issuers, who sold bonds not to price-descriminate market players who do not create money out of thin air, but directly to the central bank. And indicatively, while the ECB did not explicitly highlight it, in the last week for example, the ECB bought bonds issued by APRR, Engie, HeidelbergCement, Metso, Sagess and Saint Gobain. The full list of ECB corporate bond holdings can be found here, courtesy of UBS....