Pros and Cons
“In terms of the proportion of sterling corporate bonds Carney’s buying, it is not all that impressive,” Edwards continued.
Carney’s £10bn sterling bond target amounts to spending roughly £0.5bn per month, Edwards said. “Although that sounds like a lot, the sterling market had new issuance of £5bn in the first 4 days after he’s spoken. That’s ten times his monthly allowance issued into the market because he spoke.”
“Global investment grade corporates have increased their debt at a low borrowing cost in order to award equity holders. We would be concerned about that coming off the back of this programme.”
He added the beneficiaries of Carney’s corporate bond program will likely be high quality UK sectors, such as healthcare, utilities and telecoms, companies with long dated bonds.
On the flip side, however, he lamented the fact that fundamental valuations and credit research had been replaced by the central bank technical.
“The market had already priced in a difficult operating environment accurately,” he said. “We know the programme has had an immediate effect. The question is whether it can drive things forward,” he stressed.
And importantly, Edwards said, a better funding environment is not a cure-all for the pre-existing structural and cash flow problems certain companies possess.
“A good company is still a good company and a challenged company is still challenged. Whether there is a better funding environment or not, we still have to consider if a company will still be around five, let alone 40 years later to pay that money back.”
For this reason, Reznick argues that investors need to be “even more vigilant” in assessing the credit risk they are taking on.
“If you start buying credit risk indiscriminately, you can end up chasing yield that is not rewarding you for the risk you are taking. Exogenous players in the market serve as a catalyst for valuations to price through fundamentals so investors need to be mindful of idiosyncratic risks and where they are.”
However, the impact of the BoE’s programme could help certain companies in their strategic refinancing efforts, Reznick noted.
“There is also an opportunity in early redemptions of bonds at a premium as part of some liability management exercises. Companies may take advantage of the tighter spreads to refinance debt and extend their maturity profiles at advantageous levels,” he said.
