On Friday we wrote our latest take on how the ECB's CSPP, or corporate bond buying program, in which we explained how this ECB's latest market manipulating adventure is about to crush the fundamentals of the European (and soon, courtesy of the ECB's "SPV" loophole, global) bond market. We showed how the ECB, in its latest attempt to become an even more market-moving hedge fund, is set to buy billions in corporate bonds and not just European but also international, as long as they have a European-domiciled (read Ireland or Netherland) SPV holdco.
The big picture details were as follows:
- May buy in primary and secondary markets
- Issue share limit of 70% per ISIN
- Inclusion of bonds issued by insurance companies
- Can buy bonds of companies incorporated in the euro area whose ultimate parent is not based in the euro area
- Remaining maturity of 6 months and maximum of 30Y
BofA's disturbing assessment of the ECB program for broader markets was surprisingly gloomy:
Firstly, the credit market could (worryingly) become much less sensitive to fundamentals such as commodity prices. For instance, if commodity prices fall, debt spreads of Glencore could still tighten if the ECB remains an active buyer of their bonds.
Secondly, there is clear motivation for non Euro-Area companies to issue Euro debt via a Euro-Area incorporated SPV. Our understanding is that the process (and time needed) to set up such a vehicle is not too cumbersome.
If this is the way that the credit market in Euros develops, then the ECB could potentially be “corporate QE’ing the world”. All credit markets stand to benefit in such a scenario as the trickle-down effect looks significant to us.
Yet, investors will need to keep an even closer eye on the likelihood that credit spreads disconnect from fundamentals. For instance, if the ECB buys UK credits then this will exacerbate the lack of Brexit premium in the £ credit market.
And while we speculated how long until we get a US shale company "incorporating" an SPV in Europe to take advantage of the ECB's backstop generosity, we didn't have long to wait until we found the first aberration of how Mario Draghi is making a mockery of price discovery.
As Dow Jones writes, moments ago Unilever NV was set to raise money in bond markets Monday that will cost the consumer-goods giant almost nothing, in the latest sign of how the European Central Bank's stimulus measures are slashing funding costs across the continent.
In one tranche of a €1.5 billion deal, the Anglo-Dutch company was set to sell €300 million of debt maturing in 2020 with a coupon of 0%, potentially offering investors a yield of just 0.06%, according to deal guidance released Monday by underwriting banks.
The Unilever bonds will be one of the lowest-yielding euro debt sales on record, and one of the first since the ECB released details on Thursday of its plans to start buying corporate bonds in June.
As predicted in early March, borrowing costs for major European corporations have dropped sharply since the ECB said in March it planned to start buying nonbank euro-denominated corporate debt later this year. This is understandable: after all with a central bank backstopping bond risk, there is no risk in buying these bonds. In fact, we expect the Unilever tranche to promptly break to the upside after the break for trading, pushing its yield negative, a historic first for a corporate bond.
Dow Jones writes that banks handling the Unilever deal have received orders of around EUR4 billion from investors for the debt sale, which also included eight-year and 12-year bonds, according to the deal notice. The eight-year bonds are expected to offer a yield of around 0.66%, while the 12-year bonds are expected to offer a yield of around 1.18%, according to a person familiar with the deal. Both these bonds will have positive coupons.
The bonds will price later Monday. Citigroup Inc., Deutsche Bank AG, HSBC PLC and Banco Santander SA are underwriting the deal.
And thanks to the ECB, we fully expect all of these Unilever tranches to promptly sport a negative yield after they break for trading in what is now a euphoric corporate bond market which like Europe's Treasury market, will no longer be driven by fundamentals and entirely by central bank frontrunning.