Picture: REUTERS/REGIS DUVIGNAU/ILLUSTRATION
Picture: REUTERS/REGIS DUVIGNAU/ILLUSTRATION

Peugeot’s equity holders might not think much of its takeover of Italy’s Fiat Chrysler Automobiles but bondholders appear to love the idea.

Fiat’s credit spreads (the extra yield above the benchmark) have tightened by as much as one-third after news of the deal emerged, accompanying a jump in the company’s share price.

Peugeot’s shares fell sharply because of concerns about the premium it would have to pay, but the French company’s credit spreads modestly improved. It’s interesting that Peugeot’s shareholders and bondholders took such different views.

One reason is that the European Central Bank is restarting its quantitative easing (QE) programme, meaning there’s a big new buyer in the eurozone for investment-grade corporate bonds. If Peugeot-Fiat becomes a reality it will have the right hallmarks to attract Christine Lagarde’s Frankfurt institution.

While there’s no firm deal yet, the credit ratings agency S&P Global Ratings says the creation of the world’s fourth-biggest carmaker would support Fiat’s debt ratings.

Potential purchases

However, the ECB could be the real driver for shrinking both companies’ credit spreads. The central bank has just restarted its so-called corporate sector purchasing programme as part of the €20bn per month QE bond-buying scheme. According to Mahesh Bhimalingam of Bloomberg Intelligence, there could be about €2.5bn per month of corporate debt purchased.

Fiat is already rated BBB- by Fitch Ratings, after being upgraded to investment grade from junk in November 2018. This makes it eligible for inclusion onto the ECB’s list of potential purchases. Peugeot was junk-rated too until recently, but is now a stable BBB- across all the major ratings companies. Both companies were too late to feature in the first round of ECB asset-buying, which snapped up €178bn of corporate bonds.

The ECB isn’t going to suddenly build huge holdings in Fiat or Peugeot debt, but it’s logical to assume that it will look to add newly eligible industrial names. On average, the central bank owns about 20% of any holding’s total eligible debt. It doesn’t officially buy bonds to make a profit but it’s common sense to prefer an asset that offers some yield when compared to the negative rates of sovereign debt.

Furthermore, as the chart above shows, the ECB likes carmakers. It probably owns up to €75bn of debt in the three German car giants — Volkswagen, Daimler and BMW.

It would be strange indeed then if it didn’t acquire a decent chunk of the bonds in one of Europe’s biggest cross-border industrial combinations. That must put a supportive floor under the Fiat and Peugeot credit spreads.

Bloomberg

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