EUR Spread Tightening to Continue, Awaiting QE Details: Analysts
(Bloomberg) -- Spreads of EUR-denominated credit pared their tightening this week amid uncertainty about the details of the ECB’s program to buy IG non-financial corporate bonds and its likely size, analysts say.
- Analysts from Goldman Sachs to RBC see potential for spreads to continue to grind tighter although HSBC warns price action around the ECB’s covered bond and ABS buying programs suggests they may widen again in a couple of months
- NOTE: More companies may issue bonds, following AB InBev’s lead, as ECB prepares to add corporate bond purchases, according to Bloomberg strategist Simon Ballard
- Goldman Sachs (Lotfi Karoui, Spencer Rogers)
- The ECB has yet to provide details regarding the size and country allocation of the program
- Expect a quarter of the additional EU20b of monthly QE purchases will be allocated to corporate bonds, and purchases to reflect the capital key
- The country eligible pool sizes differ significantly depending on whether the issuer or the parent company’s domicile is used, with the Netherlands’s pool almost 3 times the size if the former applies
- Rally in EUR credit has room to run across the board
- BofAML (Barnaby Martin, Ioannis Angelakis and Souheir Asba)
- The biggest credits the ECB will likely have to focus on are EDF, Total, BMW, Engie, Enel, ENI, Shell and Orange
- That said, price action since the announcement shows that a name being heavily represented within the ECB’s eligible universe doesn’t guarantee it will be the best performer
- Estimate purchases will be between EU3b-EU5b per month with ~EU2b of secondary buying; much depends on whether ECB action will convince firms to sell bonds, given risk to ratings and recent trend to deleverage
- One dilemma is how ECB will manage early tenders; if it chose to refrain from buying short-dated bonds to mitigate the risk, the universe of eligible bonds would drop to EU361b vs EU554b
- HSBC (Analysts led by Jamie Stuttard)
- Expect more details from the ECB in around four weeks’ time
- Possible eligibility restrictions could include a ruling out of hybrids and subordinated bonds, a focus on quality to cut risk of owning fallen angels, a precise definition of IG ratings -- 62% of all non-financial EUR IG bonds with euro-zone country of risk have at least one BBB rating -- as well as issuer and maturity limits
- Further details may include how the ECB will treat fallen angels, the primary, secondary market split of purchases and minimum issue size
- There’s no guarantee eligible bonds will outperform rest of market
- Corporate spreads may widen in a few months’ time, should the quantity of the program disappoint or if it encourages issuance
- RBC
- Calculate EU610b of corporate bonds are realistically purchasable and expect ECB to buy ~EU5b per month
- Includes issues with more than EU250m outstanding and assumes no maturity bracket
- North Europe corporates to benefit the most with France attracting more than its GDP share on high outstanding volume
- Recommend spread tighteners as the ECB buying a significant chunk of the market should lead to a further grind tighter
- ABN Amro (Hyung-ja de Zeeuw)
- The size of the assets eligible for CSPP could range between EU300b to EU530b depending on whether the ECB excludes financial corporations other than credit institutions included in the IG9 classification
- If floating rate notes, bonds with a less than 1 year maturity and/or less than EU500m outstanding were eligible that could add EU220b of assets
- Could buy up to 14% of the total pool of outstanding bonds, although risk is to the downside
- The ECB could buy up to EU10b per month if it is allowed to hold up to 70% of an issue in the primary market; estimate will buy ~EU6b of iBoxx non-financials in the primary and secondary market combined, although again the risk is clearly to the downside
- Spreads could tighten another 10bps-15bps before June
- Commerzbank (Marco Stoeckle, Bernhard Gruenaeugl)
- Credit markets are only starting to price in CSPP; how much further they can tighten depends on the scheme’s final structure
- Market response capped; may reflect uncertainty about what further restrictions the ECB may impose on the scheme
- Could impose restrictions on more sectors, based on residency and incorporation as well as ISIN, tenor and rating limits
- May also need to take steps to mitigate impact on market liquidity such as repo facilities
- ECB would struggle to establish a monthly run rate above EU3b-EU5b, given expected eligible issuance in 2016 is only only ~EU83b; would still be enough to push spreads tighter
- The right time to buy corporate hybrids and HY, at the cost of seniors, is before the ECB starts purchases
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Barnaby Martin (Merrill Lynch International)
Bernhard Gruenaeugl (Commerzbank AG)
Hyung-Ja De Zeeuw (ABN AMRO Group NV)
Ioannis Angelakis (Merrill Lynch International)
Jamie Stuttard (HSBC Bank PLC)
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