The ECB strikes again...

The ECB unveiled the technical details surrounding its Corporate Sector Purchase Programme (CSPP).

At its last monetary policy meeting, on 10 March, the ECB announced that, among other measures, it was going to expand its Quantitative Easing policy by including Corporate Sector debt in its asset purchase programme, increasing its monthly amount to €80bn (from €60bn currently). Purchases would begin in June 2016 and be effected until March 2017 at least. They would take place through both the primary and the secondary markets.

One month later, the ECB unveiled the technical details surrounding its Corporate Sector Purchase Programme (CSPP), striking a heavy blow! Indeed, the ECB, probably expecting to have to deal with the usual questions around “asset scarcity”, opted for a rather broad definition of eligibility criteria! Eligible Issues will have to qualify as collateral for Eurosystem credit operations, be denominated in euro, rank senior in the capital structure, have a remaining maturity of between 6 months and 30 years at the time of purchase and be rated at least BBB- by one of the three credit rating agencies. More specifically, the issuer of the debt instrument will have to be a non-banking corporation (including the insurance sector) domiciled in the euro zone, even if its parent company is not based there. In other words, papers such as General Electric could also be added to the shopping list!

Regarding purchases on the primary market, the central bank could be an active actor. Even if some room for interpretation still exists, we estimate the outstanding universe of eligible corporate bonds to be around €565bn. Of the eligible universe, €44bn come to maturity in 2017 and €64bnin 2018. If we assume that all debts maturing in 2017 debt maturities, 70% maturing in of 2018 maturities and that potentially 20 new issuers could tap into the euro market. A total of € 109Bn could would have to be refinanced between June 2016 and March 2017. Should the ECB manage to receive a 50% allocation in each, primary purchases would amount to €6bn per month. As a consequence, we expect robust activity in the primary market for the foreseeable future. When it comes to the secondary market, assuming a holding rate of 10% per issue, national banks could buy another €6bn a month. All in all, monthly purchases could thus reach €12bn per month! Much more than just a symbolic measure… this means that, after 9 months of buying, the ECB would hold 7% of the European Investment Grade Credit market! Such an impact could have a damaging effect on an already illiquid market.

If this programme is added to the existing ECB QE, total asset purchases would reach €1.8 trillion by March 2017. The ECB balance sheet would then hit a record high of €4 trillion, representing 37% of euro-area GDP. By comparison, the FED balance sheet currently stands at 25% of GDP…

In conclusion, Investment credit should materially benefit from an ECB backstop, limiting their spread-widening. But, for a yield flirting with 1%, investors would probably reallocate their risk towards juicier asset classes such as high yield.