ECB Rules Out Automatic Sales of Corporate Bonds Cut to Junk

  • Purchases of company securities will begin on June 8
  • Policy makers willing to buy notes with negative yields

The European Central Bank, which is set to begin buying corporate bonds next week, said it won’t have to sell notes downgraded to junk as it fleshed out the latest expansion of a stimulus program.

Securities can be retained even if their ratings fall below the criteria for purchase in the rebooted quantitative-easing plan, it said in a statement Thursday. Acquisitions will begin on June 8, marking the latest phase of policy makers’ efforts to boost growth and lending in the region.

The decision to hold onto downgraded bonds may reflect the ECB’s desire to avoid creating price swings in the market. The announcement in March that it would start buying corporate debt helped drive borrowing costs toward record lows and spurred a flood of issuance.

“The fact that the ECB won’t be a forced seller is supportive for the market,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management Plc, which oversees about 291 billion pounds ($420 billion). “I still question how much tolerance they have got for a large downgrade.”

Notes issued by non-bank companies with an investment grade from at least one ratings provider will be eligible for purchase. The ECB may also buy securities with a negative yield as long as it’s above the deposit facility rate of minus 0.4 percent, it said in the statement Thursday. The bank will publish a weekly list of its corporate bond holdings and notes will be made available for lending from July 18, according to the statement.

For a quick overview of Thursday’s ECB announcement, click here.

The bonds join a list of assets eligible for purchase under the QE program that includes government debt and mortgage-backed notes. Some state-backed companies, including Italian utilities Enel SpA and Snam SpA, have been reclassified so that their debt will be eligible for purchase under the Corporate Sector Purchase Program instead of a government-debt acquisition plan.

While the ECB is still to say how much it will spend on corporate bonds, analysts estimate that just 5 billion euros ($6 billion) per month would be enough to change the face of the market. Rabobank International estimates the ECB will buy 4.7 billion euros of bonds, while Barclays Plc had predicted as much as 15 billion euros. 

Policy makers will be “mindful” of the purchases’ impact on liquidity and will consider how scarce bonds are when picking which notes to buy, according to the statement.

ECB President Mario Draghi’s announcement of the program’s expansion in March boosted Europe’s corporate bond market. Companies issued more than 50 billion euros of bonds in the single currency in May, the second-busiest month on record. The average yield investors demand to hold euro bonds sold by investment-grade companies has fallen to near the lowest in a year at 1.04 percent, Bank of America Merrill Lynch Index data show.

Euro-area national central banks will buy corporate debt issued by non-bank companies maturing between six months and 30 years on behalf of the ECB, according to an April statement.

“The start of the buying should provide a boost to the market, even for bonds that aren’t eligible,” said Aengus McMahon, the London-based head of European high-yield research at ING Bank NV. 

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