ECB May Reshape Euro Corporate Debt by Driving Long-Term Issuesby and
Central bank to purchase bonds with maturities up to 30 years
Plan may lure overseas borrowers looking to lock in low rates
The European Central Bank’s plan to start buying corporate bonds may lead to a market that’s both longer-dated and more international.
The institution intends to purchase notes with maturities of as much as 30 years as it expands quantitative easing to include company debt. That may encourage businesses to issue long-term notes, traditionally a small part of the euro market, so they can lock in near-record-low borrowing costs. Overseas companies may also sell more euro debt as the ECB purchase criteria cover some bonds backed by international businesses.
“This will be a sea-change for the credit market in Europe,” said Barnaby Martin, a European credit strategist at Bank of America Corp. “We need to now live and die by the ECB-eligible list.”
The ECB’s looming emergence as a large buyer of corporate debt is already helping to fan long-term issuance. Companies including Anheuser-Busch InBev NV and Unilever have sold about 26 billion euros ($29 billion) of securities due in a decade or more since the ECB announced plans to buy company bonds on March 10, according to data compiled by Bloomberg. That almost matches the tally in the preceding seven months.
“Borrowers that want to issue longer-dated bonds could now have a consistent and sizable investor,” said Marco Baldini, Barclays Plc’s London-based head of European corporate and sovereign, supranational and agency syndicate. “Historically, demand has been patchy.”
The average maturity for euro corporate debt is six years, compared with 13 years for sterling-denominated bonds, according to the Bank of England. The difference is partly due to differing pensions and insurance regulations, it said.
The Frankfurt-based ECB will start acquiring non-bank corporate bonds in June. It will buy as much as 70 percent of issues, provided they are ranked investment grade by at least one credit-rating company. The acquisitions are part of the central bank’s 80 billion euros a month quantitative-easing program.
The ECB’s purchase criteria include some bonds issued by euro-area units of companies based elsewhere in the world. That may lure more international issuers as it could widen the funding advantage of selling bonds in euros instead of dollars. The average yield on investment-grade notes in the single currency is 1.06 percent, versus 3.18 percent for dollar debt, based on Bank of America Merrill Lynch index data.
Still, how great this effect will be is hard to judge because the ECB hasn’t given sufficient details on which overseas-backed bonds it will consider, said Hyung-Ja de Zeeuw, an Amsterdam-based senior credit strategist at ABN Amro Bank NV.
“When you read the small print, the program suddenly appears much smaller,” she said. “We definitely need more guidance from the ECB.”
For bondholders, a drawback in the shift to longer maturities is so-called duration risk. Changes in interest rates have a greater impact on the price of long-term fixed-rate notes than on short-term bonds, so the market may tumble if borrowing costs start going up. Furthermore, uncertainty about when the ECB will stop buying corporate bonds could leave investors struggling to sell long-term notes, said Jonathan Pitkanen, the head of investment-grade research for EMEA and Asia at Columbia Threadneedle Investments, which oversees about 320 billion pounds ($470 billion).
“This is unlikely to be a long-term program,” he said. “Once it ends, there won’t be a huge new market of natural buyers of 30-year maturity bonds.”
For now, the risks are paying off. Euro non-financial corporate bonds maturing in 10 years or more have handed investors returns of 7.4 percent this year, compared with 1.1 percent for notes due in one year to three years, Bank of America Merrill Lynch index data show.
“Investors are hunting for yield, and the ECB’s support in the long end will further boost appetite,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “Companies are happy to oblige, because the longer the maturity, the better it is for them.”