Bank of England to Buy Company Bonds From Next Week

Bank of England to Buy Company Bonds From Next Week

March 19 (Bloomberg) -- The Bank of England will start buying corporate bonds from banks as soon as next week as part of its 75 billion-pound ($108 billion) asset-purchase plan to spur lending.

The Bank of England will buy investment-grade corporate debt in portions of as much as 5 million pounds at auctions held four days a week from March 25, according to a statement today. Policy makers aim to “reduce liquidity premia on high-quality corporate bonds, and so remove obstacles to corporate access to capital markets,” the statement said.

The purchases are part of the U.K. government’s so-called quantitative easing strategy to pump money into the economy and help alleviate the recession. The Bank of England started buying commercial paper in February and government bonds last month, sending 10-year gilt yields to a record low.

“Anything that helps lower borrowing costs in this environment is a good thing,” said Juan Esteban Valencia, a London-based strategist at Societe Generale SA.

Chancellor of the Exchequer Alistair Darling has given the central bank authority to buy as much as 150 billion pounds of securities with newly created money under its Asset Purchase Facility. Most of the initial sum of 75 billion pounds will be spent on U.K. government debt, and the Bank of England will start purchasing corporate bonds rated at least Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s and Fitch Ratings next week.

Eligible Companies

Britain’s biggest insurer Aviva Plc, GE Capital Corp. and Tesco Plc, the U.K.’s largest retailer, are among companies whose debt is eligible for purchase under the central bank’s plan, according to the statement.

The Bank of England should purchase lower-rated corporate debt to effectively free up the credit markets, according to Gary Jenkins, a strategist at Evolution Securities Ltd.

“I’m not sure that I would be looking to buy the high- quality corporate bonds that have absolutely no problem accessing the market,” said London-based Jenkins. “There are two really stressed types of borrowers -- banks and high-yield corporates -- and those are the people that need help.”

Investment-grade companies sold 16 billion pounds of bonds this year, a four-fold increase from the same period in 2008, according to data compiled by Bloomberg. In Europe, sales of euro- and pound-denominated debt in 2009 reached 100 billion euros ($137 billion) this week, the earliest in the year it has ever reached that level.

The bond market is already “open to investment-grade companies,” said Societe Generale’s Valencia.

Corporate Bonds Rise

The Markit iBoxx Sterling Non-Financial Corporate bond index jumped as much as 0.9 percent to 95.89 before the Bank of England statement. The benchmark index was up 0.4 percent at 95.38 as of 4:48 p.m. in London.

Bonds must be graded at the minimum investment-grade levels by at least two of the rating agencies to be eligible for purchase, the Bank of England said. Companies with debt graded by one or more ratings companies at below the minimum level won’t be bought.

The central bank also said it won’t purchase bonds from companies that have the lowest minimum rating if they are on negative outlook or negative watch.

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