By Thomas De Souza
After years of supporting corporate credit, the European Central Bank and the Bank of England are about to reverse course, just as global growth begins to slow.
While the BoE and the ECB have With the same aim of fighting inflation by reducing monetary support for corporate credit, the way in which they prepare to unwind their programs could have different impacts.
The ECB plans to end the CSPP program by Q3 2022 after accumulating a business portfolio of nearly €338 billion. As active purchases come to an end, the bank will continue to reinvest maturing debt, providing some support for credit markets. By contrast, the BoE is set to unwind its holdings, selling nearly £18bn of bonds “earliest possible” by the end of 2023. Although the MPC said the sell-off program of assets will be designed to avoid disrupting the IG corporate bond market in sterling. , this is much easier said than done. The BoE’s projected sales are roughly equal to net issues in the sterling corporate market in a typical year, which, even in a well-organised programme, will prove difficult for the market to absorb.
While the loss of support will be felt in both markets, differences in program structure and portfolio composition will have distinct impacts. ECB purchases have been evenly distributed across sectors, risk countries and issuer ratings, which in theory should not have an outsized impact on any specific market segment. The BoE, however, holds more than 40% of its portfolio in utilities, as well as significant holdings in areas that may struggle to find market-clearing levels for ESG reasons, such as tobacco.
The exact impact of the withdrawal from the corporate credit markets remains to be determined, although the cost of funding private issuers in both markets is likely to increase. As the ECB retreats from its role as a marginal buyer in the European primary market and the BoE begins to release its holdings into the market, we are likely to see new issue premia rise, forcing issuers to pay to secure funding. . The subsequent increase in borrowing costs could slow mergers and acquisitions, share buybacks and investments, but could be felt more by issuers that depend on capital markets for funding, such as autos, utilities and real estate.
The banking sector is an area of possible opportunity for investors: neither the BoE nor the ECB have included banks in their buying programs, and as a result the sector has traded at a discount to its peers. The absence of monetary support may lead to a broader revaluation of corporate spreads, but banks, on the other hand, will not be directly impacted by the unwinding of purchase programs.
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