As part of its post-Brexit monetary policy reaction plan, the Bank of England will begin buying up to £10 billion of sterling investment grade corporate bonds from mid-September.
Bank of America, Merrill Lynch’s credit strategist Barnaby Martin, believes that the bank’s aim here is clear, governor Mark Carney and the rest of the monetary policy committee is looking to tighten corporate bond spreads, promote issuance and ultimately revitalize a moribund funding market for British companies.
Barnaby Martin and team have touched on this topic before. Indeed, at the beginning of July after the dust from the UK’s EU referendum had started to settle, the team published a research note claiming that the BoE had to restart corporate bond purchases to oil the wheels of the UK’s debt market. As I wrote at the time:
“If the UK is to thrive in the post-Brexit world, the country needs a vibrant and deep credit market underlying it…Building a “super-competitive economy” as many pro-Brexit voters desire, requires a strong Sterling credit market with the ability to issue bonds and raise capital with ease.
Unfortunately, in its current state, the Sterling credit market is anything but strong. The issuance of £ corporate bonds has been dwindling since 2013 and this year there has only been £4 billion of non-financial investment-grade issuance in the Sterling Credit market — that’s only slightly more than 10% of the 2012 total of £33 billion.
The ECB’s extraordinary monetary policies of the last few years have pulled UK funding capital into the Euro credit market. In 2009, 53% of UK corporates’ liabilities were denominated in Sterling. Today, the figure is just 29%.”
It looks as if the BoE has reached a similar conclusion. By reducing credit spreads via the £10 billion corporate bond purchase program, corporate bond issuance can once again flourish and by buying corporate bonds the BoE expects investors to replace their bond holdings with other higher yielding assets — a strategy that is supposed to deliver a greater return in stimulus terms than vanilla gilt buying.
QE for the world?
The BoE has already highlighted that the eligible universe of sterling denominated corporate bonds will be around £150 billion. The bank will buy bonds from firms making a material contribution to economic activity in the UK. Corporate bonds issued by banks, building societies, and insurance companies will not be eligible. Bonds will need to be in issue for at least a month and must have a minimum amount in issue of £100 million. Bonds eligible for the scheme must also be investment-grade rated by at least one major rating agency (allowing for some investment grade/high yield crossover names to be eligible).
And just like the European Central Bank’s Corporate Sector Purchase Programme, the BoE’s, Corporate Bond Purchase Scheme will benefit companies both inside and outside the UK.
Bank of America estimates that UK companies will make up 65% of the bonds acquired under the scheme. US companies make up 10% of the eligiable universe, French companies 9% and German companies 8%.
What’s more, some companies will benefit from both the ECB’s and BoE’s asset purchase programs, which should be very bullish for their spreads. The names that are eligible for both programs are EDF, RWE, E.On Enel and Orange.
The sectors that should benefit the most from the BoE’s CBPS are Utilities (31% of the sector’s bonds are eligible), consumer (26% eligible) and communications (14.1% eligible). There are just under 170 corporates that fit the criteria for purchases with 417 bonds in total qualifying.