As part of the European Central Bank’s efforts to try and stimulate the European economy, it has spent around $129 billion buying corporate bonds. These bond purchases fall under the bank’s Asset Purchase Program.
As the program is supposed to be a regional stimulus, the bank cannot pick and chose which bonds it wants to buy; the only guidance is that bonds can only be purchased if they have at least one IG rating from Moody’s, S&P, Fitch or DBRS. The Eurosystem is not a forced seller if bonds are downgraded below IG.
Such a broad non-fundamentals based strategy was always going to come with risks; something policymakers have acknowledged:
“As on any diversified portfolio of credit instruments, risks from the deterioration of issuers’ credit quality or from defaults of issuers cannot be totally excluded.”
The most significant credit loss so far emerged last week when South African based Steinhoff International imploded spectacularly. German prosecutors are investigating whether Steinhoff International inflated its revenue and book value, which has lead to concerns about the strength of the group’s balance sheet. The stock is down around 85% since these allegations emerged.
How Much Will Buying Corporate Bonds Cost The ECB?
The ECB is one of the company’s creditors. As the Financial Times reports, as of December 1 a Steinhoff Europe AG’s 2025 bond was listed as one of the 1054 distinct securities held on the ECB balance sheet as part of the Corporate Sector Purchase Programme. According to HSBC, in the days after prosecutors announced their investigation, the Steinhoff Europe 1.87% 2025 fell in price from 83.75 to 57, and Moody’s downgraded it the next day from Baa3 to B1 watch negative.
Jamie Stuttard, Head of European Credit Strategy at HSBC, wrote in a research note published today that this is likely to be the last potential default the ECB has in its bond portfolio. The credit team at HSBC estimates that the CSPP portfolio has !a 1y issuer weighted default rate of 0.13% and a 5y issuer weighted cumulative default rate of 1.27%,” which indicates that over a period of five years, 3.2 issuers could default. While this isn’t a disastrous level of defaults, and interest received on the bond portfolio should easily cover losses, the losses “may underline the finite nature of the programme.”
“To orthodox central bank views, assets on the balance sheet should either be sovereign or secured in some manner,” the report goes on to note.