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QE Impact

27 November 2017 by lberuti

Until last week, the ECB had been buying bonds issued by GLENLN ( Glencore Plc ) under its Corporate Sector Purchase Program, in which the central bank purchases the debt of investment grade companies as part of its quantitative easing strategy. In September, the commodity house moved the domicile of its bond-issuing entity from Luxembourg to Jersey, taking it outside the euro-area and making it ineligible for the CSPP. While the ECB had previously announced that it would not be forced to sell bonds if a company’s rating fell below investment grade, it had not commented on what would happen if a company changed its domicile. Now we know. A spokesman told the FT today that “the Eurosystem decided to sell its GLENLN holdings purchased under the CSPP because these bonds had lost their eligibility due to the re-domiciliation of the issuer to a non-euro area country”. If it does not disclose the size of its individual holdings of debt from different companies, the ECB publishes the list of their ISINs, which are unique identifiers for each bond. While the list published regarding the week ending November 17 showed that the ECB held five of GLENLN’s bonds, the data related to the week ending November 24 included none. It might go a long way in explaining the underperformance since November 15 of GLENLN’s 5-year CDS compared to the 5-year CDS of AALLN (Anglo American Plc) and of MTNA ( ArcelorMittal SA ) which are usually very closely correlated. Since then, GLENLN’s 5-year risk premium was almost unchanged (it went from 134bps to 131bps), while AALLN’s was 11bps tighter at 124bps and MTNA’s 13bps tighter at 133bps.