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The CARES Act, liquidity tracked and green AT1s unpacked

By Jasper Cox, Jon Hay
10 Jul 2020

Each week, Keeping Tabs brings you the very best of what we have found most useful, interesting and informative from around the web. This week: liquidity in the age of central banks, making bank capital green, and US fiscal stimulus.

The International Capital Markets Association (ICMA), an industry group, has published its third quarter report, which is a useful guide to market participants’ views on what has happened over the last few months as it relates to capital issuance, trading, repo and collateral and asset management.

Keeping Tabs noticed Arthur Carabia’s warning on liquidity in the report. “Managers may still find it more difficult and costly than before the crisis to find buy/sell positions and settle trades,” he said. “Asset purchases by central banks initially improved liquidity, but subsequently, as they buy and hold bonds to maturity, the bonds become scarcer, which could explain why the improvement in liquidity could remain capped in the medium-term.”

Similarly, Andy Hill warned elsewhere in the report that while central bank help, particularly the European Central Bank’s Pandemic Emergency Purchase Programme announcement on March 18, was seen as crucial in making sure European secondary bond markets carried on working, “there is a counterview that this could be more problematic in the longer term as it creates a market dependency on central bank intervention in order to function effectively, particularly in times of stress.”

As for the primary markets, this week BBVA issued a green additional tier one (AT1) bond, which has raised a host of philosophical questions about the nature of green debt (GlobalCapital covered the deal here and here).

Charlene Malik at TwentyFour Asset Management raised one of them, noting that the bank said the bond might be used to refinance an existing AT1. “This causes some confusion. Will this bond be used as capital against lending for sustainable projects, or will it be used to buy back an existing AT1?

“BBVA does already have €2.9bn of eligible green assets in its portfolios, so technically it could do both. However, the key question from an ESG [environmental, social and governance] point of view is whether this will improve the sustainability of the company, and on this we will have to reserve judgement for now.”

Another issue that got Keeping Tabs thinking is that unlike an ordinary senior bond, an AT1 has value as capital, giving it similar properties to ordinary equity.

Given that banks operate under capital and leverage limits, a greater capital base allows a bank to expand its liabilities by a certain multiplier. All in all, this means that issuing a certain amount of capital allows the bank to expand its assets (and the sum of net new lending) by an amount that is greater than the size of the capital increase.

Following this line of thinking, as an AT1 theoretically unlocks more lending than the size of the issue itself, should a green AT1 reflect this, and be matched against a greater size of green assets?

This would be different to ordinary green bonds, where the size of the liability and the size of the green assets are matched on a one-to-one basis.

On the topic of ESG, here is some crucial information for any capital markets issuer or investor. CDP, the organisation companies use to report their carbon emissions, has brought out new temperature ratings.

If you are one of the top 4,000 issuers in the world, you have been rated as to how hot your activities are going to make the world. It is not comforting reading. Investors who say they have not got good enough data to invest sustainably should find out about temperature ratings and then see whether they still hold that view. (Some more information from GlobalCapital here).

In the US, the scheduled expiration of the CARES Act at the end of the month would have big implications for ordinary people, the wider economy, and perhaps the upcoming presidential election. The act, among other things, increases unemployment insurance by $600 a week. Nathan Tankus is worried about its expiration.

“The May and June jobs numbers were always going to be a dangerous trap for media reporting on the coronavirus depression,” he writes. “The business press’s breathless horse race treatment of whether jobs numbers came in ‘above expectations’ or ‘below expectations’ is about predicting shifts in short-run market interest rates and stock prices, not about the informational needs of ordinary individuals (or even more foresighted businesspeople).” 

He concludes: “Life support for the US economy is running out and the next few weeks are of critical importance to the lives of millions of people.”

Finally, clothes retailer Iffley Road, founded by former Morgan Stanley banker Claire Kent, offers 10 tips on running to work, perhaps useful for when you return to the office, if you want to avoid public transport without clogging up roads.

By Jasper Cox, Jon Hay
10 Jul 2020