Beruflich Dokumente
Kultur Dokumente
21 March 2016
Corrected Note (first published 18 March 2016) (See page 15 for details)
AC
(44-20) 7134-1539
saul.doctor@jpmorgan.com
Daniel Lamy
AC
(44-20) 7134-0467
daniel.lamy@jpmorgan.com
Matthew Bailey
(44-20) 7134-2384
matthew.a.bailey@jpmorgan.com
The programme is not designed to make money for the ECB and as such we
believe that scarcity will become a significant driver or spreads going forward.
Large issuers and large sectors are unlikely to see significant tightening
pressure on spreads. Cheap bonds can remain cheap for a long time while
expensive bonds can become more so.
Moritz Duembgen
(44-20) 7742-7956
moritz.duembgen@jpmorgan.com
Dennis Wang
Looking at the lessons from the covered bond purchase programme (CBPP) and
public sector purchase programme (PSPP) we find that credit spreads have
likely tightened 50% of what we expect to see prior to implementation; higher
beta and duration should also perform. We would caution against staying very
long post implementation of the programme as performance is largely priced in
by the time the programme starts.
(44-20) 7134-1473
dennis.wang@jpmorgan.com
J.P. Morgan Securities plc
Rebased to100
120
Germany
Spain
UK
100
90
2.5
80
70
1.5
60
50
0.5
40
Aug-14
Germany
3.5
110
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
0
Dec-14
Jan-15
Spain
Feb-15 Mar-15
Apr-15
UK
May-15
Jun-15
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Eligible universe
Following the announcement that corporate bonds would be added to the
Eurosystems asset purchase programme, we believe the task of designing the
programme now falls to ECB staff. How would we go about designing a corporate
sector purchase programme?
The first step is to define the universe of eligible assets. There are a number of ways
to do this. We could start with the cash bond indices which contain the liquidly
traded bonds in the credit market. Alternatively, we could start with the ECBs list of
eligible collateral. The fist list would highlight the liquid bonds, but would exclude
eligible bonds that were less liquid but still available for purchase. The second would
include more bonds, but would likely include a significant number of illiquid bonds.
We have chosen a different route in this note and have started with all the corporate
bonds listed by Bloomberg.
Eligible universe
Bloomberg lists close to 1.5 million corporate bonds. To reduce this to the list that
we believe will be eligible we include only Eurozone, Euro-denominated, NonBank/Public Sector, Non-Subordinated, Investment grade bonds which leaves us
with 1,519 bonds that we believe are eligible (Table 1). Given the difficulty in
determining liquidity in the European credit market, we have reduced this list further
by only including bonds with a notional outstanding of greater than 100 million.
Additionally, we believe there would be little benefit from buying bonds with less
than two years to expiry since this would leave the Eurosystem at risk of having to
purchase a significantly larger number of bonds when these mature. This leaves us
with 874 bonds from 209 issuers with a notional outstanding of 540bn.
Country composition
Unsurprisingly, countries with larger economies have more corporate debt. The bulk
of this debt (61% by notional) comes from French and German corporates. Italy,
Spain, the Netherlands and Belgium account for a further 31% of the total meaning
that 92% of all issues come from these seven countries. Five countries have no
eligible debt Cyprus, Greece, Latvia, Lithuania and Malta (Figure 3).
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Include
All corporate bonds
Eurozone
Euro Denominated
Non-Bank/Govt
Non-Subordinated
Investment grade
> 100MM
> 24 Months
# Bonds
1,452,000
102,315
87,032
8,058
7,442
1,519
1,139
874
40%
35%
30%
25%
20%
15%
10%
5%
0%
Proportion of Notional
France
Germany
Italy
Spain
Netherla
Belgium
Austria
Ireland
Finland
Portugal
Slovakia
Luxemb
Estonia
Slovenia
Cyprus
Greece
Latvia
Lithuania
Malta
Saul Doctor
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Rating composition
Delving into the rating distribution, we find that there are no AAA rated issuers in
the universe and only 7% of bonds are AA rated. The remaining debt is almost
equally split between A and BBB. The very lowest rated issuers, BBB-, account for
55bn or 10% of the universe. Excluding these would therefore reduce the eligible
assets to just under 500bn. (Table 2). We use the same definition of rating as the
ECB does for eligible collateral, i.e. the highest rating from a rating agency.
Table 2: Outstanding by Rating
# Bonds
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBTotal
0
22
21
18
139
60
163
217
139
95
874
Percent
0%
3%
2%
2%
16%
7%
19%
25%
16%
11%
Notional (M)
22,100,000,000
15,460,000,000
7,850,000,000
97,304,832,456
49,212,550,000
98,049,146,875
132,072,523,979
66,283,269,116
54,483,386,000
542,815,708,426
# Issuers
0%
4%
3%
1%
18%
9%
18%
24%
12%
10%
0
6
3
6
33
14
40
57
28
22
209
Percent
0%
3%
1%
3%
16%
7%
19%
27%
13%
11%
Maturity breakdown
As noted earlier, we believe that purchases of bonds with less than two years to
maturity are unlikely. Doing so would leave the ECB open to having to buy
significantly more corporate bonds in the near term as these bonds mature. We note
that there is no maturity limit for CBPP3; PSPP however targets bonds between 2-30
years. Like CBPP3 we believe that the CSPP will similarly not have a stated
minimum or maximum maturity for purchases but the 2-30 years guideline will be
used.
Most bonds, 43%, have maturities less than 5 years with only 12% having maturities
of greater than 10 years (Figure 4). The average maturity is 6.8 years although this is
skewed by a few very long dated bonds such that the median maturity is 5.6 years.
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Sector composition
By sector, we find that 21% of bonds fall into the Utility sector with Consumer, Noncyclical as the next largest sector (19%). Technology (2%) on the other hand is the
smallest sector with Basic Materials at 5% of the total (Figure 5).
Figure 4: Outstanding by Maturity
% of Total Eligible
% of Total Eligible
25%
35%
29%
30%
25%
25%
15%
21%
10%
20%
15%
5%
14%
5%
12%
5%
12%
8%
11%
10%
2%
0%
10%
10%
21%
19%
20%
2%
0%
1-3
Source: J.P. Morgan.
3-5
5-7
7-10
10-20
20+
Source: J.P. Morgan.
Designing a CSPP
Having seen the composition of the eligible market, we now turn to how purchases
could be structured. We believe that two factors will be key when designing the
programme.
1) Market neutrality.
2) ECB capital key.
The first of these criteria is based on our view that the ECB would aim to achieve a
diversified portfolio of Eurozone corporate credit risk. In the Q&A for the PSPP, the
ECB states that its intention is to be market-neutral and we believe a similar policy
will apply here. This will likely be done by ensuring that the purchases are made
broadly in proportion to the universe of eligible assets. This means buying across
sectors and maturity tenors rather than trying to base purchases on ratings. In our
view a rating restricted programme would be difficult to achieve. Restricting
purchases to AA and A issuers would dramatically reduce the number of eligible
assets to 290bn (Table 2).
For the public sector purchase programme (PSPP) the central banks stick rigidly to
the ECB capital key which reflect the shareholding of the different national central
banks in the ECB. The correlation of purchases made under the programme to the
capital key is close to 1 (Figure 6). For the covered bond purchase programme
(CBPP), the proportion of purchases from each country are not made public. This is
likely because issuance is dominated by Germany, France and Spain. Anecdotally we
have heard that the capital key is not kept to as rigidly in the CBPP as for the PSPP
however due to the risk sharing model of the ECB, central banks tend to purchase
their domestic issuers. For the CSPP we similarly expect market neutrality to be the
driving factor but for the Capital Key to also play a part.
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1-3
5,657
9,752
16,439
11,406
5,450
6,425
8,556
1,950
10,211
3-5
4,530
18,094
21,060
32,230
11,990
16,781
16,014
1,900
31,934
5-7
7,100
18,054
16,450
19,778
10,467
18,045
10,138
2,000
30,079
7-10
5,600
8,884
8,200
26,007
9,850
13,790
12,882
2,350
25,040
10-20
1,200
7,410
4,150
10,538
7,600
1,850
3,206
1,000
14,445
20+
200
670
909
3,342
2,056
1,927
2,320
Total
24,287
62,864
67,208
103,301
45,357
58,947
52,724
9,200
114,029
Total
Total (%)
75,845
14%
154,534
29%
132,111
25%
112,602
21%
51,399
10%
11,424
2%
537,916
1
Total (%)
5%
12%
12%
19%
8%
11%
10%
2%
21%
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Issuer Country
Belgium
France
Germany
Germany
Germany
Germany
France
France
Spain
Netherlands
France
Italy
Italy
Sector Level3
Consumer, Non-cyclical
Utilities
Consumer, Cyclical
Consumer, Cyclical
Consumer, Cyclical
Communications
Energy
Communications
Communications
Energy
Utilities
Communications
Energy
iBoxx Rating
A
A
A
A
A
BBB
AA
BBB
BBB
AA
A
BBB
A
Outstanding
23,000,000,000
21,900,000,000
15,800,000,000
15,200,000,000
14,090,000,000
11,750,000,000
11,400,000,000
11,275,000,000
10,350,000,000
10,200,000,000
10,170,304,000
10,156,669,000
10,000,000,000
% of Total
4.3%
4.1%
3.0%
2.9%
2.6%
2.2%
2.1%
2.1%
1.9%
1.9%
1.9%
1.9%
1.9%
France
35%
30%
20.0%
Germany
25%
20%
15.0%
15%
10.0%
10%
5.0%
5%
Belgium
Netherlands
Spain
Italy
5%
15%
20%
0%
0.0%
0%
5%
10%
15%
20%
0%
10%
25%
30%
This seems to have been the experience from the covered bond market. In Figure 8
we plot the ECB capital key versus the outstanding universe of covered bonds from
different countries. This shows a higher proportion of Spanish bonds relative to its
capital key than the same measure for Italian bond. If we look at the performance of
spreads into and following the ECB announcement of the CBPP in September 2014
and start of the purchase programme in October 2014 (Figure 9) we can clearly see
the outperformance of Italy once the programme starts. A similar pattern is observed
for France versus Germany with German covered bonds outperforming once
purchases started.
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35%
30%
110
France
Spain
Italy
100
25%
Germany
Spain
20%
90
80
15%
10%
5%
Netherlands
Belgium
0%
0%
5%
10%
70
Italy
60
15%
20%
25%
30%
50
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
At the other end of the spectrum, we would highlight the countries with few bonds
outstanding; in particular Estonia, Portugal, Slovakia and Slovenia (Table 5). The
scarcity of bonds from these countries means that once again we believe they will be
in high demand. The eligible bonds from these smaller countries are shown in Table
6 it is likely that they are already hard to find.
Table 5: Eligible Universe by Country
Country
France
Germany
Italy
Spain
Netherlands
Belgium
Austria
Ireland
Finland
Portugal
Slovakia
Luxembourg
Estonia
Slovenia
Cyprus
Greece
Latvia
Lithuania
Malta
Notional
194,553,290,381
137,769,137,000
49,178,829,938
48,073,952,982
38,098,964,000
34,492,900,000
10,158,465,000
8,944,020,000
8,270,000,000
6,190,000,000
3,547,852,125
2,290,000,000
983,297,000
265,000,000
-
Number of Bonds
Number of Issuers
306
213
73
79
64
47
25
18
19
14
6
5
4
1
0
0
0
0
0
60
45
21
24
17
12
11
10
9
3
4
2
2
1
0
0
0
0
0
Proportion of Notional
35.8%
25.4%
9.1%
8.9%
7.0%
6.4%
1.9%
1.6%
1.5%
1.1%
0.7%
0.4%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Capital Key
20.1%
25.6%
17.5%
12.6%
5.7%
3.5%
2.8%
1.6%
1.8%
2.5%
1.1%
0.3%
0.3%
0.5%
0.2%
2.9%
0.4%
0.6%
0.1%
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Issuer
Eesti Energia As
Eesti Energia As
Eesti Energia As
Elering
Brisa Concessao Rodov Sa
Brisa Concessao Rodov Sa
Brisa Concessao Rodov Sa
Brisa Concessao Rodov Sa
Brisa Concessao Rodov Sa
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Ren Finance Bv
Ren Finance Bv
Ren Redes Energeticas
Granvia A.S.
Spp Distribucia As
Spp Infrastructure Fin
Spp Infrastructure Fin
Zapadoslovenska Enrg As
Zapadoslovenska Enrg As
Petrol D.D. Ljubljana
Country
Estonia
Estonia
Estonia
Estonia
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Slovakia
Slovakia
Slovakia
Slovakia
Slovakia
Slovakia
Slovenia
Sector
Utilities
Utilities
Utilities
Utilities
Industrial
Industrial
Industrial
Industrial
Industrial
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Industrial
Utilities
Utilities
Utilities
Utilities
Utilities
Energy
Rating
BBB
BBB
BBB
A
BBB
BBB
BBB
BBB
BBB
BBBBBBBBBBBBBBBBBBBBB
BBB
BBB
AA
AAAABBB-
Outstanding (M)
152
106
500
225
300
120
300
300
300
650
300
750
600
1000
750
400
300
120
1168
500
750
500
315
315
265
Maturity
02/10/2018
18/11/2020
22/09/2023
12/07/2018
02/04/2018
08/06/2020
01/04/2021
22/03/2023
30/04/2025
15/04/2019
29/06/2020
14/09/2020
20/01/2021
18/01/2022
22/04/2025
16/10/2020
12/02/2025
16/01/2020
30/09/2039
23/06/2021
18/07/2020
12/02/2025
14/10/2018
14/10/2023
24/06/2019
40%
2013
35%
2014
2015
2016
30%
25%
20%
15%
10%
5%
0%
1-3
Source: J.P. Morgan.
3-5
5-7
7-10
10+
Initial Move
3-5
Pre-Implementation
5-7
7-10
Post-Implementation
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How to buy?
One common complaint from corporate bond investors in recent years has been about
deteriorating liquidity making it harder to transact in the secondary market. This
poses the question of how the ECB/NCBs should conduct purchases in order to
achieve its desired scale, while minimising price distortions.
Greater reliance on primary market purchases is one way of moving towards these
goals, in our view. Buying 10-20%, say, of a benchmark sized (500mm+) new issue
is easy compared with buying a similar notional of debt through secondary market
purchases, though it is subject to being allocated bonds by the issuer. It is also
possible for the Eurosystem to join the order book at a price determined by other
investors, meaning that the ECB is not the marginal price setter.
For secondary market transactions, we expect the Eurosystem will contact dealers
asking for competing offers on specific instruments. The problem we see with this
approach is that dealers do not hold large inventories of corporate bonds, we believe,
and are unlikely to want to short blocks of bonds that are on the CSPP list. This
would make it particularly difficult to conduct transactions in illiquid or obscure
securities.
To have the greatest chance of success in executing the CSPP, we think that the
Eurosystem will need to allow investors to participate in the auction process via
dealers, which means publishing to the market a list of the securities to be purchased
in advance of each auction. This was the route that the Bank of England took in
2009.
So far the Eurosystem has not published security level details of assets purchased
under its other ongoing purchase programmes. Given the granular nature of the
corporate bond market and the potential for price dislocations in individual securities,
we think theres an argument for greater transparency around corporate purchases.
The Bank of England published the results of each auction, including the amount
offered, the amount accepted, and the auction price. Even if the Eurosystem chooses
not to release these details, future purchases may become public if the CSPP is still
ongoing when trade reporting requirements extend to corporate bonds under MiFID
II.
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Unlike government bonds, for corporate bonds, the increase in inflation expectation
and sentiment should lead to lower credit spreads as the programme is implemented.
However, this should be set against the impact of higher issuance with corporates
increasing leverage as spreads move tighter. The Japan experience was not dissimilar
from CBPP3 and PSPP spreads widen post implementation of the programme. The
longer-term trend however was of spreads tightening as additional stimulus was
added.
Figure 12: Japan Corporate Spreads and Corporate Bond Purchases
Vertical line represents latest implementation of Corporate QE
100
AA
75
50
25
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15
Source: J.P. Morgan.
CBPP3 was announced on 4 September 2014 and purchases started a month and a
half later on 20 October 2014. PSPP was announced on 22 January 2015 with
purchases similarly starting a month and a half later on 9 March 2015. In our
analysis, we look at what happened to asset prices in three stages, immediately
following the initial announcement, prior to the initial purchases and then again post
implementation of the programme.
We draw the following conclusions:
1) Asset prices perform immediately following the announcement, and
continue to perform into implementation date. Duration performs better with
higher beta names typically outperforming.
2) The initial performance accounts for around 50% of the total preimplementation performance.
3) Post implementation however the reverse happens and assets underperform
with duration and higher beta names seeing the biggest reversal.
4) The underperformance post the PSPP was significantly more severe than for
the CBPP with assets giving back more than their initial performance in the
PSPP. Covered bonds by contrast moved lower but did not give up their
initial performance following implementation of CBPP.
5) We also note that synthetic exposure through swaps underperforms in the
initial move and then outperforms subsequently.
11
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CBPP3
PSPP
Start
20-Oct-14
09-Mar-15
Rebased to100
Rebased to100
120
Germany
Spain
UK
110
120
Spain
UK
100
100
80
90
80
60
70
40
60
20
50
40
Aug-14
Germany
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
0
Dec-14
Jan-15
Feb-15 Mar-15
Apr-15
May-15
Jun-15
We find that in both the CBPP3 and the PSPP, duration performed going into the
programme but then underperformed once implementation started. In CBPP 5y5y
forward spreads moved higher once implementation started although they did not
give back all of the previous gains (Figure 13). With PSPP, duration similarly
performed but then significantly underperformed on implementation (Figure 14).
12
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% change in spreads
Rebased to100
200
Spain 5y5y
Germany 5y5y
Germany 5y5y
Spain 5y5y
150
100
50
1
0
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
0
Dec-14
Jan-15
Source: xx
Jan-15
Feb-15 Mar-15
Apr-15
May-15
Jun-15
Source: xx
0.60
Feb-15
Mar-15
30
0.50
0.40
0.30
0.20
0.10
0.00
Dec-14
Dec-14
Jan-15
Feb-15
Apr-15
Apr-15
May-15
Jun-15
Jun-15
13
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14
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Corrected Note: Corrected text on page 7 to insert missing word: "As part of the PSPP, it is worth noting that these issuers AREN'T
eligible for primary market purchases."
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Explanation of Credit Research Ratings:
Ratings System: J.P. Morgan uses the following issuer portfolio weightings: Overweight (over the next three months, the recommended
risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended
risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months,
the recommended risk position is expected to underperform the relevant index, sector, or benchmark). NR is Not Rated. In this case, J.P.
Morgan has removed the rating for this security because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating no longer should be relied upon. An NR designation is not a recommendation or a rating. NC is Not Covered.
An NC designation is not a rating or a recommendation. Analysts can rate the issuer, the individual bonds of the issuer, or both. An issuer
recommendation applies to all of the bonds at the same level of the issuers capital structure, unless we specify a different
recommendation for the individual security. When we change the issuer-level rating, we are changing the rating for all of the issues
covered, unless otherwise specified. For CDS, we use the following rating system: Long Risk (over the next three months, the credit
return on the recommended position is expected to exceed the relevant index, sector or benchmark), Neutral (over the next three months,
the credit return on the recommended position is expected to match the relevant index, sector or benchmark), and Short Risk (over the
next three months, the credit return on the recommended position is expected to underperform the relevant index, sector or benchmark).
Valuation & Methodology: In J.P. Morgan's credit research, we assign a rating to each issuer (Overweight, Underweight or Neutral)
based on our credit view of the issuer and the relative value of its securities, taking into account the ratings assigned to the issuer by credit
rating agencies and the market prices for the issuer's securities. Our credit view of an issuer is based upon our opinion as to whether the
issuer will be able service its debt obligations when they become due and payable. We assess this by analyzing, among other things, the
issuer's credit position using standard credit ratios such as cash flow to debt and fixed charge coverage (including and excluding capital
investment). We also analyze the issuer's ability to generate cash flow by reviewing standard operational measures for comparable
companies in the sector, such as revenue and earnings growth rates, margins, and the composition of the issuer's balance sheet relative to
the operational leverage in its business.
J.P. Morgan Credit Research Ratings Distribution, as of December 31, 2015
Global Credit Research Universe
IB clients*
Overweight
23%
68%
Neutral
59%
62%
Underweight
18%
56%
Note: The Credit Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the
table above.
*Percentage of investment banking clients in each rating category.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
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QIB Only
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