- In a surprising move ahead of next week’s policy meeting the ECB decided to temporarily lower the collateral requirements in credit operations by accepting certain types of ‘fallen angels’. It complements measures already taken before and will last until September 2021.
- The ECB explicitly left the door open for further easing measures. In our view the Governing Council paves the way for high yield purchases as the assumption of V-shaped recovery underlying the ECB’s March projections is proving much too optimistic. Buying high yield paper would ensure that firms benefit from the high accommodative ECB policy measure more broadly and contain the risk of a liquidity crunch on a wave of corporate downgrades.
- Broader collateral eligibility is alleviating the pressure on fallen-angels liquidity profile as banks will be inclined to continue lending to them post COVID-related downgrade. The amount of debt concerned is so far relatively small (but may rise on further downgrades) while the improvement to their funding capacity is key.
- Should peripheral sovereigns get downgraded, some corporates will also be mechanically downgraded. Hence, in such case, we expect the size of incremental collateral available to increase significantly as senior peripheral bank debt would become eligible.
- CSPP and PEPP eligibility would have an even stronger impact, and likely signal the return of non high-yield specialists to the HY space. As a second-round effect, we also think that it should support BBB rated bonds as it would make a looming downgrade to HY less painful as it is alleviating in part the market pressure on the cost of capital for corporates.