Monday, August 22, 2016

Now The ECB Is Buying Corporate Debt Directly From Companies

I almost titled this post "Oh Good Grief, Bloomberg's Matt Levine mentioned 25% of the stories that I also found postworthy today" but had second thoughts when I realized that headline would mean nothing to long-suffering reader.

Here is Mr. Levine's A.M. linkfest, "Mirror Trades and Tax Tricks".

Anyhoo, I just read Mr. L's Monday "Money Stuff" post, checked timestamps, saw he was, unbeknownst to me, interested in many of the same things, but earlier, better, backwards and in heels.*

For the record he linked to the Bloomberg story I headlined Artificial Intelligence: "How This Hedge Fund Robot Outsmarted Its Human Master"  and the WSJ story "In Scramble for Yield, Pension Funds Will Try Almost Anything". Additionally, he linked to the Journal story that is this post's subject, which we had in the queue.

Inexplicably he didn't post on the annual walk through the cornfields to determine probable yields, about which one trader said:
"Social media will be buzzing with pictures and stories about what is really out there,"
Mr. Levine also missed the wonderful video in "Technology and Percussive Maintenance".
He did however have links to around a hundred other stories, although no footnotes today.

I had an intro all set to go, Cantillon effects from the location of central bank or treasury injections of money (MZM).
TL;DR: you want to be first in line for the loot, before general price levels rise (although some say that's a fallacy of composition), but I got so flustered seeing Matt stalking me from in front that I'm reduced to referring thou to the Wikipedia page on M. Cantillon who knew enough about economics to make and book a fortune off John Law and the Mississippi bubble.

Again, anyhoo...

From the Wall Street Journal, August 21:

Seller’s Paradise: Companies Build Bonds for European Central Bank to Buy 
Two European firms have sold debt directly to the ECB through private placements, a startling example of how the market is adapting to extremes of monetary policy

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.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. 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 ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

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.
The ECB had bought more than €16 billion of corporate bonds as of Aug. 12, according to the latest available data from the central bank, after starting purchases in early June. The lion’s share has been already-issued bonds trading in secondary markets, but some has come in new debt sales, according to the ECB.

And Morgan Stanley has arranged two private placements that have been bought by the ECB, according to a Wall Street Journal analysis of data from Dealogic and national central banks.

The ECB cited its website when asked to comment on the corporate-bond-buying program. On Thursday, it updated information on the site to clarify that the bank can participate in private placements. The ECB isn’t involved in defining the characteristics of the bonds in these sales, a spokeswoman for the central bank said.

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.

For the company, such a sale allows it to raise cash quickly without having to draft a bond prospectus. Investors, for their part, are guaranteed to get a sizable chunk of the bonds they want to buy without having to compete with the wider investment community.

"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....MORE
*This is not the first time I've used the quote about Ginger Rogers to refer to ML. In "The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)" it was:
I was informed that the theses that took me three five posts to present was wrapped up by Matt Levine in one little package two days prior to my attempts. And he does it better, backwards and in heels. Plus, to get the alliteration in the headline I had to mix up the alpha and the beta.
From Bloomberg...
If interested see also:
"Which corporate bonds has the ECB been buying?"
Climateer Line of the Day: In With The In Crowd Edition
Frontrunning the ECB: "Investors in corporate bond ‘land grab’ ahead of ECB buying"--UPDATED
"The ECB’s momentous step into corporate asset purchases"
Deutsche Bank On the European Central Bank: We Are Governed By Idiots
Pictet: "The Pricing And Valuation Of Bonds No Longer Reflects Fundamentals" - Why This Matters