We also expect this to exert a knock-on effect on companies earning €50m per year or less that are too small to issue high-yield bonds, as tightening spreads push some high-yield investors into the less liquid direct lending markets. In the past we have seen this trend in northern Europe: the double-digit yields being promised only a few years ago have now reduced to single digits, which could lead some investors to explore lending to small Italian or Spanish companies.
Finally, in addition to direct purchases and the spillover effects, we expect a longer-term positive impact for non-investment bonds as a lower cost of capital for larger, investment-grade issuers triggers a wave of acquisitions of smaller, high-yield competitors.
There is at least one important risk associated with the new program, however. Companies too small or highly-leveraged to issue high-yield bonds under normal circumstances may be able to do so in this environment.
That has been the case in every bull market in credit, however, and overall the ECB corporate bonds purchasing program should be positive for European high yield. In addition to the reasons we have set out above, having a large, ongoing buyer like the ECB in the market should alleviate much of the risk of financial shocks in the eurozone.
