The European Central Bank (ECB) recently announced the €750bn Pandemic Emergency Purchase Programme (PEPP). The bond purchase programme was given statutory footing on the 24 March 2020 in line with Decision ECB/2020/440 and Decision ECB/2020/441.
We look at some of the key aspects of the PEPP, such as: who it is relevant to; what are the basic conditions under which debt instruments will be eligible for purchase under the programme; what do potential issuers need to consider; and what are the next steps if you are interested in issuing at this time.
Who is this relevant to?
Debt instruments issued by corporates and credit institutions are eligible for purchase under the PEPP.
What are the basic conditions for bond purchase for corporates under the PEPP?
Medium term bonds and commercial paper issued by corporates are eligible for purchase under the PEPP, subject to certain conditions.
Issuing commercial paper gives corporates a potentially quick way of taking advantage of the liquidity being provided through the PEPP. Establishing a commercial paper programme is a relatively straight forward process with template documents being available through the International Capital Markets Association.
An important eligibility criterion for purchase under the PEPP is the requirement for a minimum rating. Currently the required long term ratings are: DBRS: BBBL / Fitch: BBB- / Moody’s: Baa3 / S&P: BBB: A short-term rating is acceptable where the relevant asset has a maturity of less than 390 days. The currently required short-term ratings are: DBRS at least R2-L/Fitch at least F3/Moody's P-2/S&P A-2.
Considerations for corporates
- Do you or might you have a need for additional, short term, liquidity currently or in the near future
- Do you or would you be able to satisfy the rating requirement
- If not, could you still benefit from improved demand for, and pricing on, your paper
- If, as is likely, you have current forms of finance in place, is it possible to raise additional senior unsecured finance
- Do you have a substantial operation in the United Kingdom. If you do, it is possible you could seek to access not only the PEPP but also the Bank of England COVID-19 Corporate Financing Facility (CCFF)
- Even if, as a corporate, you do not have the required rating to benefit from either the PEPP or CCFF issuers may still benefit from better demand and pricing as a result of the PEPP: past evidence suggests that ECB bond purchases improve spreads across the market, including for bonds that are not eligible for ECB purchase programmes
In addition to the extended PEPP, the Eurosystem also provides liquidity to credit institutions through its monetary policy operations such as its long-term refinancing operations (LTROs) and targeted long-term refinancing operations (TLTROs). In order to participate in these operations, banks provide collateral to the ECB in the form of marketable assets or certain non-marketable assets that meet the Eurosystem eligibility criteria.
The ECB also announced an easing of collateral standards for assets that are eligible as collateral for these Eurosystem monetary policy operations. In particular, it will expand the scope of credit claims that are eligible as collateral to include claims related to the financing of the corporate sector.
There has not yet been additional guidance on the scope of the easing of collateral standards. It is likely, however, that many credit institutions will have an opportunity to include additional assets in their existing schemes.
Corporates and banks need to determine if they can access either of the above schemes and look at the possibility of availing of the potential liquidity in the bond markets and/or under Eurosystem monetary operations which may arise by virtue of the schemes.