What the ECB does to corporate capital structures
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What the ECB does to corporate capital structures

It’s hard to shed too many tears when a leveraged private equity company with stacks of non-recourse debt transforms into a respectable listed investment grade corporate, with the attendant switch from mammoth securitization financings to regular unsecured vanilla bonds. But monetary policy is now systematically pushing in this direction.

For German real estate firms Gagfah and for Deutsche Annington (now rolled together into Vonovia), their capital structure has turned a little more vanilla. The great private equity bet on German apartments is mostly over, and the giant securitizations which fuelled it will be unwound.

Gagfah might have its own reasons for the shift, but the bigger picture is that the European Central Bank is pushing all corporates the same way, by driving unsecured investment grade spreads inside those of senior securitizations.

In theory, the ECB is buying nearly everything. In practice, the central bank’s ABS purchase programme is a joke. It has bought a total of €20bn since it started in 2014, against €13bn in corporate bonds since June this year. Last month, it couldn’t even buy enough ABS to cover amortisation from its existing holdings.

Individual national central banks were empowered to hoover up anything they could find in covereds and corporates. ABS purchases, however, needed to satisfy a 100 page checklist before the specially mandated portfolio managers could bid. In corporate bonds, the ECB is said to even be buying private placements.

That betrays a residual suspicion of the ABS market, and a belief that corporate credit is somehow a straightforward asset class.

But the most insidious effect is on corporate capital structures. Driving up the price of investment grade unsecured debt sends the message that bonds are better than loans which are both better than LBOs and a move to highly leveraged or non-recourse funding.

If anything, though, Europe needs a little more private equity pazzaz in its corporate financing. But it’s not going to happen while the ECB backs the IG horse. That’s just one more distortion to add to the list in the central bank-twisted market. 

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