JPM - CSPP 21 Mar 2016

Europe Credit Research
21 March 2016
Corrected Note (first published 18 March 2016) (See page 15 for details)
What to Expect for the ECB's

CSPP
Focus on Scarcity
Following the ECBs announcement that corporate bonds would be included in
the ECBs asset purchase programme, few additional details have been released.
Based on what we have, our latest estimate is that there are 540bn of eligible
assets from 209 issuers.
European Credit Strategy and

Derivatives Research
Saul Doctor
AC
(44-20) 7134-1539
saul.doctor@jpmorgan.com
We believe that in designing the corporate sector purchase programme (CSPP),

the ECB will try to stay market neutral but with an eye on the ECBs capital
key. This will likely put downward pressure on spreads from Italian corporates
relative to French corporates. Bonds from smaller issuers such as Estonia,
Portugal, Slovakia and Slovenia will also likely see increased interest.
Daniel Lamy
AC
(44-20) 7134-0467
daniel.lamy@jpmorgan.com
Matthew Bailey
(44-20) 7134-2384
matthew.a.bailey@jpmorgan.com
The programme is not designed to make money for the ECB and as such we
believe that scarcity will become a significant driver or spreads going forward.
Large issuers and large sectors are unlikely to see significant tightening
pressure on spreads. Cheap bonds can remain cheap for a long time while
expensive bonds can become more so.
Moritz Duembgen
(44-20) 7742-7956
moritz.duembgen@jpmorgan.com
Dennis Wang
Looking at the lessons from the covered bond purchase programme (CBPP) and
public sector purchase programme (PSPP) we find that credit spreads have
likely tightened 50% of what we expect to see prior to implementation; higher
beta and duration should also perform. We would caution against staying very
long post implementation of the programme as performance is largely priced in
by the time the programme starts.
(44-20) 7134-1473
dennis.wang@jpmorgan.com
J.P. Morgan Securities plc
Figure 1: CBPP3 Covered Bond Spread Performance
Figure 2: PSPP 30y Govie Yield Performance
Rebased to100
Vertical bars reflect announcement, initial period and implementation date
120
Germany
Spain
UK
100
90
2.5
80
70
1.5
60
50
0.5
40
Aug-14
Germany
3.5
110
Sep-14
Source: J.P. Morgan
Oct-14
Nov-14
Dec-14
Jan-15
0
Dec-14
Jan-15
Spain
Feb-15 Mar-15
Apr-15
UK
May-15
Jun-15
Source: J.P. Morgan
See page 15 for analyst certification and important disclosures.

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This document is being provided for the exclusive use of Marta Lombardia at BANCO BILBAO VIZCAYA ARGENTARIA, S.A..
Saul Doctor
(44-20) 7134-1539

21 March 2016
Programme Eligibility What we know?

So far the only official documentation we have is the ECB press release from 10
March reproduced towards the end of this note and available here. In working out
what may be eligible we base our analysis on two pieces of information that this gave
us.
1) Investment-grade euro-denominated bonds issued by non-bank corporations
established in the euro area will be included in the list of assets eligible for
regular purchases under a new corporate sector purchase programme
(CSPP).
2) Eligibility under the Eurosystems collateral framework the rules that lay
out which assets are acceptable as collateral for monetary policy credit
operations will be a necessary condition for determining the eligibility of
assets to be purchased under the CSPP, subject to further criteria.
Securities issued by credit institutions and by entities with a parent
company which belongs to a banking group will not be eligible.
As we wrote in our European Credit Weekly, we believe the eligibility will be along
the following lines:
Type of instrument: Fixed rate, floating rate, and zero coupon bonds are eligible as
collateral monetary policy credit operations, as are inflation-indexed bonds. We
think these standards will also hold for CSPP.
Seniority: Subordinated debt is not eligible for repo operations, so corporate hybrids
would be ineligible under these criteria.
Ratings: To be eligible for repo operations, at least one credit assessment from an
accepted External Credit Assessment Institution (ECAI) must comply with the credit
quality threshold; the list of ECAIs is DBRS, Fitch, Moody's and S&P. If multiple
assessments are available, the best available ECAI assessment is applied. We
assume this will also be applied to the CSPP, meaning that issuers with split
investment grade-high yield ratings (e.g. EDP) will be eligible, subject to meeting the
other criteria.
Country of establishment: For a corporate bond to qualify for monetary policy
operations, the issuer must be established in the EEA or one of the non-EEA G10
countries, and the guarantor (if any) must be established in the EEA, unless a
guarantee is not needed to meet the required credit standards.
The criteria for eligibility under the CSPP go further, restricting bonds to
corporations established in the euro area. However, we are not entirely sure what
this means. Does it apply to the location of the issuing entity, guarantor, parent
company, or a combination thereof? Would an issuer incorporated outside the euro
area but with a significant business presence within the euro area be eligible, as was
the case for the Bank of Englands Asset Purchase Facility?
We take a fairly stringent interpretation of this clause as otherwise we believe that
there could potentially be an adverse incentive for international issuers to issue out of
a Eurozone entity simply to be eligible for ECB purchases.
Saul Doctor
(44-20) 7134-1539

21 March 2016
Industry: Securities issued by credit institutions and by entities with a parent

company which belongs to a banking group will not be eligible. As such (senior)
debt issued by an insurance company would be eligible, unless it was a subsidiary of
a banking group.
This opens up an interesting discrepancy in the Auto space. We believe that the rules
will allow Auto manufacturers with captive finance arms, such VW, to qualify for
purchases. However finance arms of Auto manufacturers where the finance arm is a
subsidiary of a bank, such as RCI Banque, would not be eligible.
Eligible universe
Following the announcement that corporate bonds would be added to the
Eurosystems asset purchase programme, we believe the task of designing the
programme now falls to ECB staff. How would we go about designing a corporate
sector purchase programme?
The first step is to define the universe of eligible assets. There are a number of ways
to do this. We could start with the cash bond indices which contain the liquidly
traded bonds in the credit market. Alternatively, we could start with the ECBs list of
eligible collateral. The fist list would highlight the liquid bonds, but would exclude
eligible bonds that were less liquid but still available for purchase. The second would
include more bonds, but would likely include a significant number of illiquid bonds.
We have chosen a different route in this note and have started with all the corporate
bonds listed by Bloomberg.
Eligible universe
Bloomberg lists close to 1.5 million corporate bonds. To reduce this to the list that
we believe will be eligible we include only Eurozone, Euro-denominated, NonBank/Public Sector, Non-Subordinated, Investment grade bonds which leaves us
with 1,519 bonds that we believe are eligible (Table 1). Given the difficulty in
determining liquidity in the European credit market, we have reduced this list further
by only including bonds with a notional outstanding of greater than 100 million.
Additionally, we believe there would be little benefit from buying bonds with less
than two years to expiry since this would leave the Eurosystem at risk of having to
purchase a significantly larger number of bonds when these mature. This leaves us
with 874 bonds from 209 issuers with a notional outstanding of 540bn.
Country composition
Unsurprisingly, countries with larger economies have more corporate debt. The bulk
of this debt (61% by notional) comes from French and German corporates. Italy,
Spain, the Netherlands and Belgium account for a further 31% of the total meaning
that 92% of all issues come from these seven countries. Five countries have no
eligible debt Cyprus, Greece, Latvia, Lithuania and Malta (Figure 3).

21 March 2016
Table 1: Defining the universe of eligible bonds
Figure 3: Proportion of debt outstanding by country
Corporate bonds listed in Bloomberg
% of total notional (540bn)
Include
All corporate bonds
Eurozone
Euro Denominated
Non-Bank/Govt
Non-Subordinated
Investment grade
> 100MM
> 24 Months
# Bonds
1,452,000
102,315
87,032
8,058
7,442
1,519
1,139
874
Source: J.P. Morgan, Bloomberg
40%
35%
30%
25%
20%
15%
10%
5%
0%
Proportion of Notional
France
Germany
Italy
Spain
Netherla
Belgium
Austria
Ireland
Finland
Portugal
Slovakia
Luxemb
Estonia
Slovenia
Cyprus
Greece
Latvia
Lithuania
Malta
Saul Doctor
(44-20) 7134-1539
Source: J.P. Morgan, Bloomberg
Rating composition
Delving into the rating distribution, we find that there are no AAA rated issuers in
the universe and only 7% of bonds are AA rated. The remaining debt is almost
equally split between A and BBB. The very lowest rated issuers, BBB-, account for
55bn or 10% of the universe. Excluding these would therefore reduce the eligible
assets to just under 500bn. (Table 2). We use the same definition of rating as the
ECB does for eligible collateral, i.e. the highest rating from a rating agency.
Table 2: Outstanding by Rating
# Bonds
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBTotal
0
22
21
18
139
60
163
217
139
95
874
Percent
0%
3%
2%
2%
16%
7%
19%
25%
16%
11%
Notional (M)
22,100,000,000
15,460,000,000
7,850,000,000
97,304,832,456
49,212,550,000
98,049,146,875
132,072,523,979
66,283,269,116
54,483,386,000
542,815,708,426
# Issuers
0%
4%
3%
1%
18%
9%
18%
24%
12%
10%
0
6
3
6
33
14
40
57
28
22
209
Percent
0%
3%
1%
3%
16%
7%
19%
27%
13%
11%
Source: J.P. Morgan.
Maturity breakdown
As noted earlier, we believe that purchases of bonds with less than two years to
maturity are unlikely. Doing so would leave the ECB open to having to buy
significantly more corporate bonds in the near term as these bonds mature. We note
that there is no maturity limit for CBPP3; PSPP however targets bonds between 2-30
years. Like CBPP3 we believe that the CSPP will similarly not have a stated
minimum or maximum maturity for purchases but the 2-30 years guideline will be
used.
Most bonds, 43%, have maturities less than 5 years with only 12% having maturities
of greater than 10 years (Figure 4). The average maturity is 6.8 years although this is
skewed by a few very long dated bonds such that the median maturity is 5.6 years.

21 March 2016
Saul Doctor
(44-20) 7134-1539
Sector composition
By sector, we find that 21% of bonds fall into the Utility sector with Consumer, Noncyclical as the next largest sector (19%). Technology (2%) on the other hand is the
smallest sector with Basic Materials at 5% of the total (Figure 5).
Figure 4: Outstanding by Maturity
Figure 5: Outstanding by Sector
% of Total Eligible
% of Total Eligible
25%
35%
29%
30%
25%
25%
15%
21%
10%
20%
15%
5%
14%
5%
12%
5%
12%
8%
11%
10%
2%
0%
10%
10%
21%
19%
20%
2%
0%
1-3
3-5
5-7
7-10
10-20
20+
Designing a CSPP
Having seen the composition of the eligible market, we now turn to how purchases
could be structured. We believe that two factors will be key when designing the
programme.
1) Market neutrality.
2) ECB capital key.
The first of these criteria is based on our view that the ECB would aim to achieve a
diversified portfolio of Eurozone corporate credit risk. In the Q&A for the PSPP, the
ECB states that its intention is to be market-neutral and we believe a similar policy
will apply here. This will likely be done by ensuring that the purchases are made
broadly in proportion to the universe of eligible assets. This means buying across
sectors and maturity tenors rather than trying to base purchases on ratings. In our
view a rating restricted programme would be difficult to achieve. Restricting
purchases to AA and A issuers would dramatically reduce the number of eligible
assets to 290bn (Table 2).
For the public sector purchase programme (PSPP) the central banks stick rigidly to
the ECB capital key which reflect the shareholding of the different national central
banks in the ECB. The correlation of purchases made under the programme to the
capital key is close to 1 (Figure 6). For the covered bond purchase programme
(CBPP), the proportion of purchases from each country are not made public. This is
likely because issuance is dominated by Germany, France and Spain. Anecdotally we
have heard that the capital key is not kept to as rigidly in the CBPP as for the PSPP
however due to the risk sharing model of the ECB, central banks tend to purchase
their domestic issuers. For the CSPP we similarly expect market neutrality to be the
driving factor but for the Capital Key to also play a part.
Saul Doctor
(44-20) 7134-1539

21 March 2016
Table 3: Eligible Assets by Sector and Maturity

Notional Outstanding
Sector
Basic Materials
Communications
Consumer, Cyclical
Consumer, Non-cyclical
Energy
Financial
Industrial
Technology
Utilities
1-3
5,657
9,752
16,439
11,406
5,450
6,425
8,556
1,950
10,211
3-5
4,530
18,094
21,060
32,230
11,990
16,781
16,014
1,900
31,934
5-7
7,100
18,054
16,450
19,778
10,467
18,045
10,138
2,000
30,079
7-10
5,600
8,884
8,200
26,007
9,850
13,790
12,882
2,350
25,040
10-20
1,200
7,410
4,150
10,538
7,600
1,850
3,206
1,000
14,445
20+
200
670
909
3,342
2,056
1,927
2,320
Total
24,287
62,864
67,208
103,301
45,357
58,947
52,724
9,200
114,029
Total
Total (%)
75,845
14%
154,534
29%
132,111
25%
112,602
21%
51,399
10%
11,424
2%
537,916
1
Total (%)
5%
12%
12%
19%
8%
11%
10%
2%
21%
What to buy? Focus on scarcity and illiquidity

When assessing what the ECB may purchase and how this would impact bonds, we
believe the guiding principle is that the Eurosystem is not a relative value buyer but
is rather a forced buyer. In our view, this has two related effects; firstly scarcity is the
key commodity and secondly illiquidity premiums are eroded. If a bond is trading
cheap to comparable bonds, there is little reason for the Eurosystem to buy this bond
away from the market price as it is likely trading cheap because lots of dealers are
offering it out; and the bond can stay cheap for a long time. Conversely, a bond that
is expensive is likely trading so because it is in high demand and it can become more
expensive.
In a normal functioning market, smaller issues and bonds from smaller sectors tend
to trade with a higher spread due to the illiquidity premium. Investors demand a
higher return for buying bonds that are more difficult to sell. In a market distorted by
a forced buyer however we see this illiquidity premium as eroding down to zero and
in some cases actually turning into a discount. Small illiquid issues could see the
biggest impact from the CSPP in our view.
Larger issuers and sectors to underperform
As highlighted earlier, we believe the ECB will attempt to remain market neutral
with respect to the eligible assets it can purchase. This means buying proportionally
more from larger sectors than from smaller sectors. Since larger sectors contain a
greater availability of assets we believe that they attract less of an illiquidity
premium than smaller sectors where there is less choice of assets available. As this
illiquidity premium is eroded through broad market purchases, we expect smaller
issuers and sectors to outperform the larger sectors such as Utilities and NonCyclicals.
Issuers with large amounts of debt outstanding also attract the least illiquidity
premiums; their abundance of debt means that they are not a scarce commodity
unless there is another reason for the increased interest as we discuss next. The
issuers detailed in Table 4 are the largest in the Eurozone.

21 March 2016
Saul Doctor
(44-20) 7134-1539
Table 4: Large Issuers

Issuers with greater than 10bn outstanding
Ticker
ABIBB
EDF
BMW
VW
DAIGR
DT
TOTAL
ORAFP
TELEFO
RDSALN
ENGIFP
TITIM
ENIIM
Issuer Country
Belgium
France
Germany
Germany
Germany
Germany
France
France
Spain
Netherlands
France
Italy
Italy
Sector Level3
Consumer, Non-cyclical
Utilities
Consumer, Cyclical
Consumer, Cyclical
Consumer, Cyclical
Communications
Energy
Communications
Communications
Energy
Utilities
Communications
Energy
iBoxx Rating
A
A
A
A
A
BBB
AA
BBB
BBB
AA
A
BBB
A
Outstanding
23,000,000,000
21,900,000,000
15,800,000,000
15,200,000,000
14,090,000,000
11,750,000,000
11,400,000,000
11,275,000,000
10,350,000,000
10,200,000,000
10,170,304,000
10,156,669,000
10,000,000,000
% of Total
4.3%
4.1%
3.0%
2.9%
2.6%
2.2%
2.1%
2.1%
1.9%
1.9%
1.9%
1.9%
1.9%
Keep an eye on country of issuance

For the CSPP, we do not expect the proportion of purchases by county to be made
public. However we would expect that the Eurosystem would likely try to stick to the
capital key as closely as possible. It is therefore interesting to plot the eligible assets
against the ECB capital key (Figure 7). This highlights that France has more eligible
corporate debt than its capital key, while Italy has a lower amount of eligible
corporate debt than its capital key. If the programme is conducted in a way to
preserve the capital key this would seem to indicate that there will be increased
demand for Italian corporates and less demand for French corporates. We have
excluded Enel, Terna and Snam from this analysis as these Italian issuers were added
to the PSPP in July 2015. As part of the PSPP, it is worth noting that these issuers
arent eligible for primary market purchases
Figure 6: PSPP Purchases versus ECB Capital Key
Figure 7: CSPP Available Assets versus ECB Capital Key
x-axis Capital Key; y-axis - % of total purchases

30.0%
R = 0.9998
25.0%
x-axis Capital Key; y-axis - % of total available assets

40%
France
35%
30%
20.0%
Germany
25%
20%
15.0%
15%
10.0%
10%
5.0%
5%
Belgium
Netherlands
Spain
Italy
5%
15%
20%
0%
0.0%
0%
5%
10%
15%
20%
0%
10%
25%
30%
This seems to have been the experience from the covered bond market. In Figure 8
we plot the ECB capital key versus the outstanding universe of covered bonds from
different countries. This shows a higher proportion of Spanish bonds relative to its
capital key than the same measure for Italian bond. If we look at the performance of
spreads into and following the ECB announcement of the CBPP in September 2014
and start of the purchase programme in October 2014 (Figure 9) we can clearly see
the outperformance of Italy once the programme starts. A similar pattern is observed
for France versus Germany with German covered bonds outperforming once
purchases started.

21 March 2016
Saul Doctor
(44-20) 7134-1539
Figure 8: CBPP Available Assets versus ECB Capital Key
Figure 9:Spain versus Italy Spread Performance
x-axis Capital Key; y-axis - % of total available assets
Rebased to 100. Vertical lines show 1) the announcement of the programme,

2) one week later, 3) the inception of the programme.
35%
30%
110
France
Spain
Italy
100
25%
Germany
Spain
20%
90
80
15%
10%
5%
Netherlands
Belgium
0%
0%
5%
10%
70
Italy
60
15%
20%
25%
30%
50
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
At the other end of the spectrum, we would highlight the countries with few bonds
outstanding; in particular Estonia, Portugal, Slovakia and Slovenia (Table 5). The
scarcity of bonds from these countries means that once again we believe they will be
in high demand. The eligible bonds from these smaller countries are shown in Table
6 it is likely that they are already hard to find.
Table 5: Eligible Universe by Country
Country
France
Germany
Italy
Spain
Netherlands
Belgium
Austria
Ireland
Finland
Portugal
Slovakia
Luxembourg
Estonia
Slovenia
Cyprus
Greece
Latvia
Lithuania
Malta
Notional
194,553,290,381
137,769,137,000
49,178,829,938
48,073,952,982
38,098,964,000
34,492,900,000
10,158,465,000
8,944,020,000
8,270,000,000
6,190,000,000
3,547,852,125
2,290,000,000
983,297,000
265,000,000
-
Number of Bonds
Number of Issuers
306
213
73
79
64
47
25
18
19
14
6
5
4
1
0
0
0
0
0
60
45
21
24
17
12
11
10
9
3
4
2
2
1
0
0
0
0
0
Proportion of Notional
35.8%
25.4%
9.1%
8.9%
7.0%
6.4%
1.9%
1.6%
1.5%
1.1%
0.7%
0.4%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Capital Key
20.1%
25.6%
17.5%
12.6%
5.7%
3.5%
2.8%
1.6%
1.8%
2.5%
1.1%
0.3%
0.3%
0.5%
0.2%
2.9%
0.4%
0.6%
0.1%

21 March 2016
Saul Doctor
(44-20) 7134-1539
Table 6: Issuers from Smaller Countries

Isin
XS0763379343
XS0235372140
XS1292352843
XS0645947457
PTBSSGOE0009
PTBSSHOM0008
PTBSSBOE0012
PTBSSJOM0014
PTBSSIOM0015
XS1057345651
XS0223447227
XS0970695572
XS0995380580
XS1111324700
XS1222590488
XS0982774399
XS1189286286
PTRELKOM0008
XS0988446786
XS1077088984
XS0953958641
XS1185941850
XS0979598207
XS0979598462
XS1028951777
Issuer
Eesti Energia As
Eesti Energia As
Eesti Energia As
Elering
Brisa Concessao Rodov Sa
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Edp Finance Bv
Ren Finance Bv
Ren Finance Bv
Ren Redes Energeticas
Granvia A.S.
Spp Distribucia As
Spp Infrastructure Fin
Spp Infrastructure Fin
Zapadoslovenska Enrg As
Zapadoslovenska Enrg As
Petrol D.D. Ljubljana
Country
Estonia
Estonia
Estonia
Estonia
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Portugal
Slovakia
Slovakia
Slovakia
Slovakia
Slovakia
Slovakia
Slovenia
Sector
Utilities
Utilities
Utilities
Utilities
Industrial
Industrial
Industrial
Industrial
Industrial
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Utilities
Industrial
Utilities
Utilities
Utilities
Utilities
Utilities
Energy
Rating
BBB
BBB
BBB
A
BBB
BBB
BBB
BBB
BBB
BBBBBBBBBBBBBBBBBBBBB
BBB
BBB
AA
AAAABBB-
Outstanding (M)
152
106
500
225
300
120
300
300
300
650
300
750
600
1000
750
400
300
120
1168
500
750
500
315
315
265
Maturity
02/10/2018
18/11/2020
22/09/2023
12/07/2018
02/04/2018
08/06/2020
01/04/2021
22/03/2023
30/04/2025
15/04/2019
29/06/2020
14/09/2020
20/01/2021
18/01/2022
22/04/2025
16/10/2020
12/02/2025
16/01/2020
30/09/2039
23/06/2021
18/07/2020
12/02/2025
14/10/2018
14/10/2023
24/06/2019
Stay below six years

As we highlighted earlier, 43% of eligible corporate debt has a maturity of less than 5
years (Figure 4); we believe that this will be the best performing part of the curve.
Firstly, we think that issuers will continue to come to market in the 7-10 year bucket
as we have seen over the past few years (Figure 10). While we have seen less
issuance in this part of the curve in 2016, we believe that as spreads decline it will
once again be more compelling to issue here. Newly issued bonds are likely to come
with a new premium and keep spreads higher. This was the experience of the covered
bond market where the average new issue maturity has been around 6-8 years
(Global Covered Bond Outlook, 2016, G Davies, pg. 5). Secondly we believe that the
central banks would be wary of buying bonds longer than 10 years given the credit
risk that they would face in such long dated purchases.
Once again we look at the experience in the covered bond market in Sep 2014 when
CBPP3 was announced. Figure 11 shows the spread performance in percent terms of
different tenors post the announcement and post implementation. While spreads
widened across the board, there is a clear outperformance of shorted dated tenors.
Figure 10: High Grade Non Financial EUR Issuance by Tenor
Figure 11: Covered Bond Spread Performance by Tenor
% of Total per year
Spread Performance (%)

25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1-3
40%
2013
35%
2014
2015
2016
30%
25%
20%
15%
10%
5%
0%
1-3
3-5
5-7
7-10
10+
Initial Move
3-5
Pre-Implementation
5-7
7-10
Post-Implementation

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21 March 2016
How to buy?
One common complaint from corporate bond investors in recent years has been about
deteriorating liquidity making it harder to transact in the secondary market. This
poses the question of how the ECB/NCBs should conduct purchases in order to
achieve its desired scale, while minimising price distortions.
Greater reliance on primary market purchases is one way of moving towards these
goals, in our view. Buying 10-20%, say, of a benchmark sized (500mm+) new issue
is easy compared with buying a similar notional of debt through secondary market
purchases, though it is subject to being allocated bonds by the issuer. It is also
possible for the Eurosystem to join the order book at a price determined by other
investors, meaning that the ECB is not the marginal price setter.
For secondary market transactions, we expect the Eurosystem will contact dealers
asking for competing offers on specific instruments. The problem we see with this
approach is that dealers do not hold large inventories of corporate bonds, we believe,
and are unlikely to want to short blocks of bonds that are on the CSPP list. This
would make it particularly difficult to conduct transactions in illiquid or obscure
securities.
To have the greatest chance of success in executing the CSPP, we think that the
Eurosystem will need to allow investors to participate in the auction process via
dealers, which means publishing to the market a list of the securities to be purchased
in advance of each auction. This was the route that the Bank of England took in
2009.
So far the Eurosystem has not published security level details of assets purchased
under its other ongoing purchase programmes. Given the granular nature of the
corporate bond market and the potential for price dislocations in individual securities,
we think theres an argument for greater transparency around corporate purchases.
The Bank of England published the results of each auction, including the amount
offered, the amount accepted, and the auction price. Even if the Eurosystem chooses
not to release these details, future purchases may become public if the CSPP is still
ongoing when trade reporting requirements extend to corporate bonds under MiFID
II.
When to buy and sell? Lessons from history

We now turn to previous asset purchase programmes to see how the assets targeted
performed in the lead into and following the purchases. We consider the experience
from the CBPP and PSPP to see how assets performed during the early stages of the
programme. Additionally, we look at the recent Japanese experience with corporate
bond purchases.
The European corporate bond market is different to both the Sovereign and Covered
bond market so history may not repeat itself, but its nevertheless informative to have
a sense of what has happened previously. The experience from the CBPP and PSPP
was of assets rallying into implementation and then selling off post implementation
of the programme. For PSPP this is to some extent the desired result as purchases are
aimed at increasing inflation expectation which should lead to higher rates. For the
CBPP we also notice that assets sold off post implementation but this could possibly
be explained by the broader market sell off targeted assets outperformed despite
spreads widening.
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21 March 2016
Unlike government bonds, for corporate bonds, the increase in inflation expectation
and sentiment should lead to lower credit spreads as the programme is implemented.
However, this should be set against the impact of higher issuance with corporates
increasing leverage as spreads move tighter. The Japan experience was not dissimilar
from CBPP3 and PSPP spreads widen post implementation of the programme. The
longer-term trend however was of spreads tightening as additional stimulus was
added.
Figure 12: Japan Corporate Spreads and Corporate Bond Purchases
Vertical line represents latest implementation of Corporate QE
100
AA
75
50
25
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15
CBPP3 was announced on 4 September 2014 and purchases started a month and a
half later on 20 October 2014. PSPP was announced on 22 January 2015 with
purchases similarly starting a month and a half later on 9 March 2015. In our
analysis, we look at what happened to asset prices in three stages, immediately
following the initial announcement, prior to the initial purchases and then again post
implementation of the programme.
We draw the following conclusions:
1) Asset prices perform immediately following the announcement, and
continue to perform into implementation date. Duration performs better with
higher beta names typically outperforming.
2) The initial performance accounts for around 50% of the total preimplementation performance.
3) Post implementation however the reverse happens and assets underperform
with duration and higher beta names seeing the biggest reversal.
4) The underperformance post the PSPP was significantly more severe than for
the CBPP with assets giving back more than their initial performance in the
PSPP. Covered bonds by contrast moved lower but did not give up their
initial performance following implementation of CBPP.
5) We also note that synthetic exposure through swaps underperforms in the
initial move and then outperforms subsequently.
11

21 March 2016
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Table 7: ECB Asset Purchase Programme

Announced
04-Sep-14
22-Jan-15
CBPP3
PSPP
Start
20-Oct-14
09-Mar-15
Following the announcement of both CBPP3 as well as PSPP, assets rallied

particularly for those assets included in the programme. In the covered bond world
we identify three periods (Figure 13):
1. Initial announcement, when all bonds rally in tandem. Even bonds not included in
the purchase programme such as UK covered bonds moved tighter over this
period.
2. Subsequently however, the market started to distinguish between bonds included
in purchases and those not with higher beta bonds of Eurozone countries such as
Spain seeing better performance.
3. Once the programme starts we continue to see outperformance of bonds included
in the programme but the higher beta outperformance has largely been priced in.
While German bonds continued to rally post implementation, Spanish covered
bonds saw little excess performance.
The performance of 30y government bonds showed a similar pattern over the period
of PSPP (Figure 14):
1. Initially all assets rallied together.
2. Assets include in the purchases outperformed with German and Spanish 30y
yields tightening more than UK yields.
3. Once implementation started, we saw underperformance of higher beta assets and
yields returned to their pre-QE level within six months.
Figure 13: CBPP3 Covered Bond Spread Performance
Figure 14: PSPP 30y Govie Yield Performance
Rebased to100
Rebased to100
120
Germany
Spain
UK
110
120
Spain
UK
100
100
80
90
80
60
70
40
60
20
50
40
Aug-14
Germany
Sep-14
Source: J.P. Morgan
Oct-14
Nov-14
Dec-14
Jan-15
0
Dec-14
Jan-15
Feb-15 Mar-15
Apr-15
May-15
Jun-15
Source: J.P. Morgan
We find that in both the CBPP3 and the PSPP, duration performed going into the
programme but then underperformed once implementation started. In CBPP 5y5y
forward spreads moved higher once implementation started although they did not
give back all of the previous gains (Figure 13). With PSPP, duration similarly
performed but then significantly underperformed on implementation (Figure 14).
12

21 March 2016
Saul Doctor
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Figure 15: CBPP3 Spread Performance Spain by tenor
Figure 16: PSPP 30y Yield Performance Spain minus Germany
% change in spreads
Rebased to100
200
Spain 5y5y
Germany 5y5y
Germany 5y5y
Spain 5y5y
150
100
50
1
0
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
0
Dec-14
Jan-15
Source: xx
Jan-15
Feb-15 Mar-15
Apr-15
May-15
Jun-15
Source: xx
Finally, we note that synthetic exposure underperformed prior to PSPP

implementation but subsequently outperformed. Relative to govies, swaps of all
tenors underperformed when PSPP was announced and continued to underperform
right up until implementation. This was particularly true for longer dated swaps
which saw the biggest underperformance but also subsequently the biggest
outperformance.
Figure 17: Swaps versus Govies by Tenor
Tenor
0.60
Feb-15
Mar-15
30
0.50
0.40
0.30
0.20
0.10
0.00
Dec-14
Dec-14
Jan-15
Feb-15
Apr-15
Apr-15
May-15
Jun-15
Jun-15
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21 March 2016
ECB adds corporate sector purchase programme (CSPP) to

the asset purchase programme (APP) and announces
changes to APP
10 March 2016
(https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310_2.en.html)
Combined monthly purchases under the APP are to increase as of 1 April 2016 to
80 billion from 60 billion.
Investment-grade euro-denominated bonds issued by non-bank corporations
established in the euro area will be included in the list of assets eligible for
regular purchases under a new corporate sector purchase programme (CSPP).
The CSPP will be added to the APP and will be included in the combined
monthly purchases.
The CSPP will further strengthen the pass-through of the Eurosystems asset
purchases to the financing conditions of the real economy.
Purchases are to start towards the end of the second quarter of 2016.
The Governing Council of the European Central Bank (ECB) today decided to
establish a new programme to purchase investment-grade euro-denominated bonds
issued by non-bank corporations established in the euro area with the aim of further
strengthening the pass-through of the Eurosystems asset purchases to the financing
conditions of the real economy. As a result, and in conjunction with the other nonstandard measures in place, the CSPP will provide further monetary policy
accommodation and contribute to a return of inflation rates to levels below, but close
to, 2% in the medium term.
Eligibility under the Eurosystems collateral framework the rules that lay out which
assets are acceptable as collateral for monetary policy credit operations will be a
necessary condition for determining the eligibility of assets to be purchased under the
CSPP, subject to further criteria. Securities issued by credit institutions and by
entities with a parent company which belongs to a banking group will not be eligible.
CSPP purchases will begin towards the end of the second quarter of 2016.
Further technical details on the CSPP will be announced in due course.
The Governing Council also decided to adjust the parameters of the public sector
purchase programme (PSPP). The issuer and issue share limits for securities issued
by eligible international organisations and multilateral development banks will be
increased to 50%. In addition, as of April 2016 the share of such securities purchased
under the PSPP will be reduced from 12% to 10% on a monthly basis. To maintain
the 20% risk-sharing regime, the ECBs share of monthly PSPP purchases will be
increased from 8% to 10%.
14
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21 March 2016
Corrected Note: Corrected text on page 7 to insert missing word: "As part of the PSPP, it is worth noting that these issuers AREN'T
eligible for primary market purchases."
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21 March 2016
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Europe Credit Research

What to Expect for the ECB's

European Credit Strategy and

We believe that in designing the corporate sector purchase programme (CSPP),

Figure 1: CBPP3 Covered Bond Spread Performance

Figure 2: PSPP 30y Govie Yield Performance

Vertical bars reflect announcement, initial period and implementation date

Source: J.P. Morgan

Source: J.P. Morgan

See page 15 for analyst certification and important disclosures.

Europe Credit Research

Programme Eligibility What we know?

Europe Credit Research

Industry: Securities issued by credit institutions and by entities with a parent

Europe Credit Research

Table 1: Defining the universe of eligible bonds

Figure 3: Proportion of debt outstanding by country

Corporate bonds listed in Bloomberg

% of total notional (540bn)

Source: J.P. Morgan, Bloomberg

Source: J.P. Morgan, Bloomberg

Source: J.P. Morgan.

Europe Credit Research

Figure 5: Outstanding by Sector

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Table 3: Eligible Assets by Sector and Maturity

Source: J.P. Morgan.

What to buy? Focus on scarcity and illiquidity

Europe Credit Research

Table 4: Large Issuers

Source: J.P. Morgan.

Keep an eye on country of issuance

Figure 7: CSPP Available Assets versus ECB Capital Key

x-axis Capital Key; y-axis - % of total purchases

x-axis Capital Key; y-axis - % of total available assets

Source: J.P. Morgan.

Source: J.P. Morgan.

Europe Credit Research

Figure 8: CBPP Available Assets versus ECB Capital Key

Figure 9:Spain versus Italy Spread Performance

x-axis Capital Key; y-axis - % of total available assets

Rebased to 100. Vertical lines show 1) the announcement of the programme,

Source: J.P. Morgan.

Source: J.P. Morgan.

Source: J.P. Morgan.

Europe Credit Research

Table 6: Issuers from Smaller Countries

Source: J.P. Morgan.

Stay below six years

Figure 11: Covered Bond Spread Performance by Tenor

% of Total per year

Spread Performance (%)

Source: J.P. Morgan.

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When to buy and sell? Lessons from history

Europe Credit Research

Europe Credit Research

Table 7: ECB Asset Purchase Programme

Source: J.P. Morgan.

Following the announcement of both CBPP3 as well as PSPP, assets rallied

Figure 14: PSPP 30y Govie Yield Performance

Source: J.P. Morgan

Source: J.P. Morgan