Spring in its step: The ECB's headquarters in Frankfurt
Dealers that were concerned about their viability as counterparties, such as Deutsche Bank, saw their credit spreads tighten along with those of other borrowers. The market for investment-grade euro bonds enjoyed a surge in issuance that provided a welcome revival in fees for banks after a disastrous start to the year in both debt and equity underwriting.
The pixie-dust effect of the ECB’s statement of intent on March 10 (it won’t actually define terms for its corporate bond buying until late in the second quarter) did not extend to the market for secondary credit trading, however.
The recent struggles by Credit Suisse to first understand and then reduce its holdings of distressed credit underscored the problems that banks have with secondary trading of corporate bonds and loans.
It could be argued that Credit Suisse should have retained its problematic credit positions in late 2015 and the first quarter of 2016 and worked down its holdings after the ECB contributed to a reversal of global spread widening.
Instead the bank realized close to $1 billion of losses that a bold trading manager might have avoided. Gutsy trading heads of the type that used to walk the dealing floors at Credit Suisse and Goldman Sachs are out of fashion now, however.
Liquidity in secondary credit trading has diminished; the ECB’s arrival as a buyer of corporate bonds is likely to exacerbate this trend. Euromoney warned last year about potential conflicts of interest in ECB purchases of bonds from corporates such as Volkswagen that suffer reputational damage and could try to exploit any implicit central bank endorsement. We also cautioned about the distorting effects of the emergence of a so-called Draghi put for corporate bonds.
The short-term impact of the March announcement that the ECB will make direct bond purchases was benign. European corporate bond spreads for non-bank borrowers that may be eligible for ECB buying fell sharply, and related financial spreads enjoyed similar and at times faster tightening.
Banks such as Barclays, Commerzbank and Santander were able to issue debt as the market for euro-denominated bond issuance revived, and US borrowers including Fedex were also beneficiaries – with US issuers able to maintain their 2015 share of roughly 25% of euro bond issuance.
One deal that seemed to demonstrate the benefits of the ECB’s move also highlights another potential pitfall, however. A week after the ECB announced its plans, AB InBev sold the largest euro-denominated bond yet seen. The €13.25 billion multi-tranche bond helped the Belgium-based brewer to fund its planned acquisition of SABMiller and generated over €30 billion of demand from investors keen to join the party in debt that may have the ECB as a backstop buyer. It also attracted investors who anticipate at least a degree of secondary liquidity, given the size of the bond.
The appeal of jumbo bonds from big issuers is causing growing bifurcation in the debt markets, which the ECB may exacerbate. Frequent borrowers with the promise of a debt issuance schedule are able to sell bonds much more easily than smaller corporates with uncertain future debt needs. This trend will not help the goal of both policymakers and investment banks in Europe of speeding up the region’s shift from corporate lending to development of broad capital market issuance comparable with that in the US.
It will also do little to boost credit trading revenues for banks, as debt investors effectively adopt a buy-and-hold policy, where the nearest thing to secondary liquidity is the prospect of further issuance by the very biggest borrowers.