Debt Seller’s Paradise
Things are so absurd in the Eurozone that the ECB is buying private
placement debt with little regard for safety. In turn, private equity
companies issue debt simply because they know in advance the ECB will buy it.
It’s a startling example of how the market is adapting to extremes of
monetary policy, and it’s a safe conclusion the experiment will not end well.
For now, it’s a Seller’s Paradise as Companies Build Bonds for European
Central Bank to Buy.
The European Central Bank’s corporate-bond-buying program has stirred so
much action in credit markets that some investment banks and companies are
creating new debt especially for the central bank to buy.
In two instances, the ECB has bought bonds directly from European
companies through so-called private placements, in which debt is sold to a
tight circle of buyers without the formality of a wider auction.
Now, they are all but inviting private actors to concoct specific things
for them to buy so they can continue pumping money into the financial system.
The furious central-bank buying has been a relief to companies and
governments that can now borrow at rock-bottom interest rates. But it has
also spurred criticism that the extreme policies are killing the returns
available to other investors, such as pension funds, and loading up the
economy and financial system with potentially overpriced debt.
The ECB was late to the central-bank party—it began quantitative easing
only in 2015, years after the U.S., the U.K. and Japan—but it has embraced
bond-buying with fervor. In March, it boosted its purchases to €80 billion
($90.6 billion) a month from €60 billion and surprised investors by saying it
would soon add corporate bonds to its shopping list.
It had already bought so many government bonds that it was running out of
things to purchase.
Private placements are private debt sales not open to the broader market,
typically relying on a handful of investors that want to buy a company’s
bonds. “Typically there won’t be a prospectus, there won’t be any
transparency, there won’t be a press release. It’s all done discreetly,”
said Apostolos Gkoutzinis, head of European capital markets at law firm Shearman
& Sterling LLP.
The ECB executes bond purchases through the eurozone’s national central
banks, which function like branches.
The Bank of Spain holds some of a €500 million private placement issued by
Spanish oil company Repsol SA on July 1, and some of a €200 million deal from
Spanish power utility Iberdrola SA sold on June 10, two days after the ECB
program got under way.
Both deals were solely arranged by Morgan Stanley and are the only private
placements issued since the start of the ECB’s corporate buying program to
have been bought by national central banks, according to the Journal
analysis. Morgan Stanley declined to comment.
“We’re all looking at the data,” said the head of credit trading at a
major European bank. “They’re only one new customer—but it’s a big one.”
And banks are rushing to serve it. Credit Suisse Group AG reshuffled its
sales coverage of national central banks in recent weeks when the trading
desk realized it wasn’t doing enough business with the new largest buyer in
town, according to a person familiar with the matter.
ECB Effect
The ECB only announces what it will buy, not how much of it. Yet, that has
spawned a guessing game driving yields lower and lower.
As soon as the ECB does buy an issue, the interest rate on those bonds
collapse. And now we see private placement of debt, specifically designed
with the ECB in mind.
QE is supposed to spur lending and investment. In practice, it’s killing
pension plans while fostering bond bubbles.
As long as the companies do not default, the ECB can simply hold the debt
to term, just as the Fed is doing now. Meanwhile, the bubbles continue to
inflate.
Mike “Mish” Shedlock
