Will Mark Carney’s corporate bond-buying help UK companies?
Companies across the UK are bracing themselves for a shake-up to the way they raise cash on the corporate finance market as the Bank of England prepares to start buying private sector debt.
Threadneedle Street will buy around £10bn of top-quality corporate bonds as part of its mission to help the UK avoid a recession in the wake of the EU referendum in a similar operation to the kind being undertaken by the European Central Bank (ECB).
Mark Carney said snapping up the corporate bonds could provide a bigger stimulus than the £60bn extension to its government debt-buying programme which was also announced last week.
"Fantastically cheap money"
For companies hoping to raise cash, it is already being seen as good news, with borrowing costs tumbling and a flurry of new funding rounds being announced.
Ioannis Angelakis, a credit derivatives strategist for Bank of America Merrill Lynch said: "There can be little doubt that the corporate bond buying programme from the Bank of England will be bullish".
In recent weeks, Vodafone has raised more than £1bn in two separate deals for 33-year and 40-year debt. BMW snapped up £600m at an interest rate of 0.875 per cent, while BP came roaring back to the sterling-denominated bond markets for the first time seen the Deepwater Horizon spill in a £650m, seven year-deal priced at 1.18 per cent.
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"This is fantastically cheap money," David Reitman, a partner in KPMG's corporate finance team told City A.M.
"UK corporates who might have been looking to issue in euros … are now rethinking. You've had a reduction in the benchmark rate and a tightening of credit spreads making it cheaper to issue directly in sterling."
Speculators, rejoice?
"The purpose of the corporate bond purchase scheme is to lower yields on corporate bonds and thus financing costs," said Mitch Reznick, co-head of credit at Hermes Investment Management. By driving down yields at the top end of the market, the scheme is also designed to push investors hungry for returns to lend to more speculative and riskier companies.
This too, appears to be happening. "The scheme has already made some difference," said Capital Economics. "Corporate bond yields fell sharply following the announcement. Corporate bond spreads … narrowed too".
So-called "spreads" are the difference in borrowing costs between two different kinds of bonds. For instance, it could be the difference between the Bank of England base rate and investment-grade borrowing, or it could be between companies with different credit ratings. If spreads are coming down, it means riskier companies are also benefiting from cheaper borrowing costs.
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Hermes' Reznick added: "Yesterday we saw the launch of a new deal from a rare sterling issuer: Places for People, which is a private, investment-grade company. I think it is pretty safe to say that we were would not have seen this bond issued this summer were it not for the corporate bond purchase scheme. To that end, the Bank of England is getting what it wants."
Fundamental issues
So far, so good – for firms, at least.
However, even overlooking the problems low yields raise for pension schemes and investors, the scheme might also warrant a closer look in terms of its impact on those companies who don't qualify for the Bank's programme.
"You've got a disconnect between what's going on in the high yield market and this frenzy in the investment grade market," said KPMG's Reitman.
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The ratings agency Standard and Poor's (S&P) suggested that despite the bond-buying by both the Bank of England and ECB, the corporate debt markets will get more choppy over the rest of the year.
Analysts also pointed out as investors start to be pushed into companies and funds they haven't before invested in, they will pay much more scrutiny to the kinds of businesses they are buying debt from, performing rigorous fundamental analysis.
"People will be quite credit specific when you move into non-investment grade, which means for the better high-yield issues where the credit fundamentals stack up, it's good. For others, however, you could imagine in some cases it [money] will either not be available or they are going to have to pay up," added Reitman.
The National Institute of Economics and Social Research (Niesr) estimates the UK economy contracted in July
Hermes' Reznick agreed, saying the "halo effect" of cheaper credit would be "name-dependent".
"For example, higher-quality issuers like Virgin Media and Travis Perkins are above pre-Brexit-vote levels, however more stressed names like Matalan are still much lower."
Cash or confidence?
There is also the issue of whether the programme will have the wider impact of supporting the UK economy. The Bank of England's programme is smaller than the ECB's, both in proportional and absolute terms, and even then, as Capital Economics point out, "there is little evidence that firms are credit-constrained … so reducing borrowing costs may not make a very large difference".
"A far bigger problem is likely to be a lack of willingness to invest on the part of firms due to the uncertainty and weaker near-term growth outlook generated by the vote to leave the EU."
At best, Capital Economics predict the programme would mean the hit to business investment over the next 18 months will "not [be] quite as severe as it would otherwise have been."