“Companies from outside the euro zone are setting up companies or vehicles to issue debt in euros and thereby qualify for the ECB’s purchase programs.”
By Nick Corbishley, for WOLF STREET:
The European Central Bank has been hoovering up the corporate bonds of a growing number of multinational firms that are not based in the Eurozone or the EU. Those firms include the finance divisions of Swiss behemoths Nestlé and Novartis, US giants Coca Cola and John Deere and UK-based British American Tobacco and WPP. It also includes the Hong Kong-based, Cayman Islands-registered conglomerate CK Hutchison Group.
How easy is it for large non-EU firms to qualify for the ECB’s corporate bond buying scheme — known officially as the Corporate Sector Purchase Program (CSPP)? As the Spanish financial daily Cinco Dias reports, all you need to qualify is:
- An investment grade credit rating. The ECB still refuses to buy junk-rated bonds. But as it says, that could change at any time.
- A subsidiary based in a Euro-Area country, usually one where you pay next to nothing in corporate taxes, such as Luxembourg and the Netherlands.
- To issue bonds in euros. More and more companies are now doing this, lured by the promise of virtually free ECB money.
€224 Billion and Counting
The ECB has been buying up corporate bonds of investment-grade companies in Europe for just over four years, now amounting to €224 billion. That doesn’t include the €35 billion of additional corporate bonds the ECB has bought as part of its pandemic emergency purchase program (PEPP).
The biggest beneficiaries of the ECB’s bond buying have been (in descending order) French, German, Italian, Spanish and Dutch firms in the energy, infrastructure, telecommunications and automotive sectors. Foreign subsidiaries of huge non-EU corporations are also eligible and have been since day one, as long as they meet the aforementioned three criteria.
What is new is the fact that many global companies are hungrier than ever for virtually free central bank money. And they’re shopping around for it.
“Companies from outside the euro zone are setting up companies or vehicles to issue debt in euros and thereby qualify for the ECB’s purchase programs,” says Fernando García, Capital Markets director at Société Générale. “Some US companies have already done it. Although the Fed has similar purchase programs on offer, they prefer to have all options on the table, so as to get the best prices.”
Quid Pro Quo.
The Fed is responding in kind by buying up dollar-denominated bonds issued by a handful of U.S. subsidiaries of some of Europe’s biggest firms. They include Nestle, which is simultaneously tapping funds from the ECB, the Fed, and the Swiss National Bank. Indeed, the 15 biggest beneficiaries of the Fed’s corporate bond buying program include four European corporations — Daimler, Volkswagen, BMW and BP.
The ECB does not divulge amounts of specific purchases, but it does divulge how many times it has bought a particular company’s bonds. Here are some of the non-EU firms that have thus far taken advantage of the ECB’s CSPP and the number of times they’ve benefited:
- Swiss food and drink conglomerate Nestlé, whose bonds have been bought by the ECB an impressive 12 times, making it one of the biggest beneficiaries of the entire bond-buying program.
- Swiss pharmaceutical Novartis (9 times).
- US agribusiness giant John Deere (6 times).
- Coca Cola (4 times).
- CK Hutchison Group (4 times). This Hong Kong-based Cayman Islands-registered conglomerate with some subsidiaries in Europe has no problems qualifying for the ECB’s bond buying program.
- Upjohn Finance, a subsidiary of US pharmaceutical company Pfizer.
- Switzerland-based pharmaceutical company Roche (3 times).
- Richemont, a Switzerland-based luxury goods holding company founded by South African businessman Johann Rupert (3 times)
- U.S. home appliance manufacturer Whirlpool (twice).
- UK-based British American Tobacco (twice).
- U.S. truck maker Paccar, which owns Dutch truck maker DAF (twice).
- The finance division of U.S. energy firm Schlumberger (twice).
- U.S. confectionery Mondelez (once).
- British contract food service company Compass (once).
The Bank of England is another major central bank that has gone out of its way to help out overseas companies. Its Coronavirus Corporate Financing Facility (CCFF) is available not only to British firms but to any firm that is deemed to provide “a material contribution to the UK economy,” which can mean just about anything. Of the 61 businesses that still have an outstanding balance with the central bank, roughly two-fifths are based overseas.
The program’s biggest beneficiaries of the BOE’s program are:
- German chemicals giant BASF, which was given a loan of £1 billion.
- German chemicals giant Bayer, infamous for having acquired Monsanto to then get swamped by Monsanto’s horrendous litigation, received £600 million in loans.
- Chanel (£600 million).
- US Cruise ship operator Carnival — a company with hefty fixed costs and collapsed revenues, which, like all major U.S. cruise liners, does not currently qualify for U.S. bailout money because it is incorporated, for tax reasons, in Panama. But what it can’t get from the U.S. it can pick up from foreign central banks.
- Australian shopping mall owner Westfield (£600 million).
- Johnson Controls, a US company that became an Irish company in 2016 via inversion after its merger with Tyco to avoid paying US income taxes.
Winners and Losers.
So far, these central bank programs have had their desired effect. After falling sharply in March, global bond issuance has bounced back in a big way. U.S. investment-grade corporations have already issued more debt year-to-date than they did in the whole of 2019, according to S&P Global Ratings. These companies, together with their European counterparts, are the biggest beneficiaries of the central banks’ bond buying, thanks to which they have been able to issue bonds at prices that would have been unthinkable just four months ago.
Many of these companies are going through serious difficulties right now. But thanks to central bank support, they can service their expenses in the face of the abrupt decline in their revenues much more comfortably than companies that can’t issue bonds and have them bought at face value in the midst of the worst crisis in decades by one or more central banks. This puts the eligible companies in a far stronger position to weather the storm, and pick up the pieces of smaller companies along the way. In this sense, the central banks are picking the winners and losers. By Nick Corbishley, for WOLF STREET.
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