Fallen Angel Risk Realized: ECB Liquidates Entire Steinhoff Position

Remember that piece of shit Steinhoff position the ECB had on its books thanks to CSPP?That would be the one we wrote about last month in “Fallen Angels And Draghi’s Steinhoff Demons.”

Amid questions about whether Steinhoff’s trials and tribulations underscore the inherent danger in the central bank’s corporate bond buying program, Draghi defended CSPP has follows at the December post-meeting presser:

It is not unusual that losses may be happening. All other central banks that ran similar programmes — do we know whether they had losses? No, because they are not disclosing the issuers, the holdings… We are much, much more transparent. We have a risk framework which has served very very well since beginning of the existence of the ECB, and if we need to draw lessons, we will certainly draw lessons.

To be sure, these concerns are hardly confined to CSPP. If we learned anything from the eurozone debt crisis it’s that sovereign debt isn’t “risk free” either, but it would be obtuse to suggest that imperiled corporate debt doesn’t add a new dimension to the equation.

Here’s what BofAML had to say a few weeks ago about the ECB’s “fallen angel” risk:

Moreover, it looks like the ECB’s language towards owning Fallen Angels has become more tentative of late. If true, we think that this has the potential to make the spreads of Fallen Angels behave more like Falling Knives.

In other words, far from being able to depend on CSPP to tamp down idiosyncratic risk or at least contain the pain, the ECB may end up choosing to sell on a downgrade. Note the following screengrab from the central bank’s CSPP guidelines webpage:

Guess what? That didn’t use to say that. It used to say only this:

The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.

Now here’s how we assessed this situation in the context of the distinct possibility that further ECB tapering is already set to allow spreads on problem sectors and credits to widen out:

If what’s keeping spreads on problem sectors and problem credits from blowing out is the persistence of the central bank bid and the hunt for yield that bid creates, well then, the removal of that bid could very well mean that spreads on cyclically challenged sectors start reflecting the operating environment.

If, on top of that, you get the ECB actually selling fallen angels, well then, the pain for those names could be exacerbated.

Hopefully you can see where we’re going with this. According to Bloomberg, the ECB has liquidated that Steinhoff position.

“The ECB didn’t purchase any new corporate bonds under its CSPP program during the week ended January 5, but no longer holds Steinhoff Europe after the company’s downgrade to deep sub-investment grade by Moody’s,” Bloomberg wrote Monday morning, before reminding you that the ECB is “restricted to buying debt with at least one investment-grade rating under CSPP [and] Moody’s cut Steinhoff’s rating to non-investment grade B1 on December 7 and then by a further 3 notches to Caa1 on December 28.”

Is this a sign of things to come? Well, for the answer to that, we’ll leave you with the same BofAML visuals and color we referred you to last month:

Using S&P’s historical rating transition matrices, we estimate that €7bn of corporate bonds that the ECB own will end up as Fallen Angels prior to maturity (by bonds impacted, this is equivalent to €38bn of total outstanding debt).