ECB’s bond purchases lack clarity over process and benefits

European Central bank (ECB) will commence purchase of corporate securities from this month onwards, which was first announced in March, as part of big stimulus package in March, which included increase in pace to €80 trillion and four new TLTROs.

However this particular purchase, still lacks lot of clarities, over its procedure and ultimate benefits.

Facts that we know so far –

• ECB will buy Euro-denominated investment grade bonds, from companies incorporated within Euro Zone, with maturities ranging from 6 months to 30 years.
• Any company incorporated in the Eurozone will be eligible, even if it has an ultimate parent based elsewhere.
• Banks are excluded, but car companies are included, even if their financial arm has banking license. Insurance companies are also eligible.
• The ECB will buy in both the primary and secondary markets by six of the NCBs, Belgium, Germany, Spain, Finland, France and Italy.

Facts that we do not know –

• How much will ECB buy every month?
• Will the purchases be evenly distributed or will there be front and back loading?

The biggest grey areas are benefits.

It is not clear, how small firms benefit from these policies. It has already started distortions in the market. Since March Investment grade bond issuance has averaged about €40 billion per month, where in this whole period, high yield bond issuance couldn’t reach €10 billion, much lower than historic averages.

Since March big companies with better rating has been able to issue more bonds, while investment grade but small ones, who never launched bonds before struggle. Big ones already had low borrowing costs.

Biggest concerns are –

Big companies may use ECB money from M&As and share buybacks, which will not provide the intended benefits. Companies may also gobble up unnecessary debt due to the sake of cheap funding.

ECB purchase may hamper liquidities in the secondary bond market.