BoE corporate bond buying: Utility sector may benefit – RBS

Imogen Bachra, Research Analyst at RBS, notes that earlier this month, the Bank of England announced that it has been mandated to buy up to £10bn worth of corporate bonds across 18 months.

Key Quotes

“In order to “impart monetary stimulus by lowering the yields on corporate bonds, thereby reducing the cost of borrowing for companies; by triggering portfolio rebalancing; and by stimulating new issuance of corporate bonds.”

The bank has set out some criteria for determining eligible bonds, which closely match those from its previous corporate bond buying programme:

• Conventional senior, unsubordinated debt.
• Bonds rated investment grade by at least one major rating agency and subject to the Bank’s assessment process.
• Cleared and settled through Euroclear and/or Clearstream.
• Minimum amount in issue of £100 million.
• Minimum residual maturity of twelve months; no perpetual debt.
• At least one month since the security was issued.
• Securities will need to be admitted to official listing on an EU stock exchange.

The main point of subjectivity arises over determining eligible issuers, rather than eligible bonds. Corporate bonds issued by banks, building societies and insurance companies will not be eligible, and only those issued by companies that make “a material contribution to UK” will be bought. The Bank of England stipulates that “companies with a genuine business in the UK will normally be regarded as meeting this requirement”. This broadens the potentially eligible universe, as it means that bonds neither have to be incorporated in, nor does their “country of risk” have to be the United Kingdom.

Using our own judgement as to whether companies have a genuine UK business, basing this on factors such as number of employees in the UK, coupled with market factors such as the proportion of GBP-denominated debt (assuming the Bank of England is more likely to buy those that have a larger proportion of sterling debt and are more likely to use that as a source of funding for capex), we estimate an eligible universe of around £162bn outstanding market value, broadly in line with the BoE’s original estimate of £150bn (price changes since then could explain some of the discrepancy). This compares to £666bn of outstanding investment grade sterling-denominated nongovernment paper, according to Bloomberg data.”