The European Central Bank (ECB) notes that the number of corporate bonds known as “fallen angels” has increased, that is, bonds of companies that have lost investment grade.
In the minutes of the April 30 meeting, published this Friday, the ECB says that although the purchases of emergency debt due to the pandemic have contributed to relaxing financial conditions and stimulating issuance, concern over the profitability of companies makes that “the financial conditions for companies and banks are more severe than before the spread of the coronavirus pandemic (COVID-19”).
The ECB notes that investment-grade companies have spreads that double those they had before the crisis, reflecting “expectations that there will be a notable increase in downgrades in credit ratings.”
“The number of ‘fallen angels’ bonds was on the rise, while the downgrades of high-yield issuers were much more noticeable. Business default rates could rise dramatically in the next twelve months,” according to ECB minutes.
The entity ensures that purchases of debt from the Eurosystem, made up of the ECB and national central banks, help “preserve a smooth transmission of monetary policy in all parts of the euro area.”
The Governing Council of the ECB also noted at the end of April meeting that ten-year sovereign debt spreads in most euro area countries vis-à-vis German debt had risen. Benchmark, regardless of your credit rating.
In some jurisdictions, sovereign bond spreads had risen to levels seen before the pandemic emergency debt purchases were announced due to expectations that emissions will increase and economic uncertainty.
The ECB also saw “signs that liquidity premiums had possibly exacerbated upward pressure on term premiums by increasing issuance needs” of governments’ debt to finance business and benefit support measures social.
The ECB has so far said it will buy 1.1 trillion euros of public and private debt from the euro area this year, although the amount is expected to increase.
At the meeting in late April, he decided to inject more liquidity under better conditions to lower interest rates on loans to companies and households.