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Investors eye company earnings fillip from ECB's bond-buying
[LONDON] Investors are betting that blue-chip euro zone companies' earning will rise as European Central Bank bond-buying lowers their borrowing costs and raises the prospect of windfalls from refinancing old debt.
The percentage boost to aggregate corporate earnings could be as high as the double-digits, some analysts say, and might even pave the way for share buybacks and more merger activity.
"There is this switch that gets flicked on this week," said Old Mutual Global Investors head of credit Tim Barker, referring to the ECB's addition on Wednesday of corporate bonds to its asset purchase programme aimed at spurring inflation and growth.
The move, announced in early March and intended to induce companies to invest and hire by cutting their funding costs, has already triggered a wave of borrowing.
Among the first bonds snapped up by the ECB were those of Italian insurer Generali, Spain's Telefonica and French utility Engie, investors and traders told IFR, a Thomson Reuters service.
"We own Telefonica shares, and therefore the ECB does offer more support for companies like that," said Andrea Williams, European equities fund manager at Royal London Asset Management.
Rory McPherson, head of investment strategy at Psigma Investment Management, said he expected consumer staples companies with solid cash-flow, such as Unilever, to be beneficiaries as well.
The ECB's actions could pave the way for more share buybacks and takeover activity, fund managers say - both of which could indirectly lift an aggregate earnings profile that has languished in the red in three of the last four years.
The ECB's intervention effectively supercharges the favourable funding conditions that European companies have enjoyed for at least two years.
Since the ECB announced in March that it would start buying investment-grade corporate bonds in euros, issuance in the sector has surged to over 110 billion euros (S$169.21 billion), IFR data shows.
McPherson and Schroders' fixed income fund manager Alix Stewart said even non-euro area companies were taking advantage of the lower funding costs, as seen by the heavy issuance of euro-denominated bonds by US companies this year.
European firms' earnings per share have fallen in three of the last four years and analysts are close to forecasting a decline in 2016, underscoring the need for companies to engineer growth.
UBS estimates that European companies pay an average coupon of about 2.8 per cent on their debt, which includes loans and bonds. According to the IBoxx non-financial cash index, the average yield for investment grade non-financial corporates was 1.15 per cent at the close of trading on Tuesday.
That sort of difference means that if all existing debt was refinanced, earnings would rise by about 11 per cent, according to Nick Nelson, European equity strategist at UBS.
More realistically, Nelson says, if European companies refinanced debts falling due from 2016 through to 2020, the lower interest payments could lift earnings by 1-1.5 per cent a year, if bond yields stayed at their current levels.
"This doesn't sound like a great deal, but after five years of no growth, and given the current consensus is close to zero earnings growth again this year, it is worth noting," he added.
Highly leveraged companies in sectors such as construction, telecoms and utilities were among those most likely to refinance their debts, and thereby engineer a boost to earnings and shareholder returns, investors said.
Goldman Sachs highlighted Telecom Italia, Fiat Chrysler, Telefonica and utility E.ON as among companies that would enjoy a lift to earnings if they refinanced debt maturing before 2019 at current yields.
Last month, Telecom Italia issued a 10-year bond for 1 billion euros, saying it would use the proceeds to refinance some of its debt.
In March, HeidelbergCement warned that while the ECB's measures were not guaranteed to boost corporate borrowing, favourable interest rates nevertheless meant the construction company was eyeing another bond issue.
"Companies know how to get their bread buttered and know that the ECB will be flopping out its chequebook in June," said Psigma Investment Management's Mr McPherson.