Bank Of America Global Research | On 22 April 2020, the European Central Bank (ECB) announced temporary measures to mitigate the impact of possible rating downgrades on collateral availability. This includes the acceptance of certain non-investment grade rated assets as collateral for its credit operations. In the collateral easing measures announced on 7 April, the ECB announced plans to temporarily mitigate effects from rating downgrades. The latest announcement provides additional details and therefore should not be a total surprise to the market.
All measures announced on 22 April 2020 will enter into effect as soon as the relevant legal acts enter into force. These temporary measures, as well as the collateral easing measures announced on 7 April 2020, will apply until September 2021 when the first early repayment of the targeted longer-term refinancing operation (TLTRO) III takes place. Further measures may also be announced by the ECB to ensure smooth transmission of monetary policy if needed. – R. Man
Stay received front-end EUR
The acceptance of certain non-investment grade rated assets as collateral may dampen concerns ahead of the upcoming rating reviews of Italy by S&P, Moody’s and DBRS. The latest measures could also dampen any upward pressure on front-end EUR rates from future rating downgrades, as the associated reduction in banks’ borrowing capacity from future (T)LTRO operations would be less than before. We view the latest measures as a non-negative development for our receive Jul-20 EONIA recommendation. – R. Man
We think yesterday’s easing of eligible collateral rules by the ECB is bullish news for corporate bond markets, especially for European high-yield spreads. We think the rule changes pave the way for the ECB to buy Fallen Angel debt as part of the Corporate Sector Purchase Programme. Should this happen, this would alleviate indigestion risk in the consumer, utility, energy and real estate sectors in high-yield. We expect the COVID-19 crisis to see European Fallen Angel volumes reach €20-30bn, but with upside to this number if there are peripheral sovereign rating downgrades.B. Martin, E. Galou