Content

Overview

In a further response to the COVID-19 (coronavirus) crisis, the European Central Bank (ECB) has launched a €750 billion Pandemic Emergency Purchase Program (PEPP), a new temporary asset purchase program of private and public sector securities, which will last until at least the end of 2020. This client briefing is based on currently available information and will be of interest to those financial institutions and corporates which are able to partake in the program.

Background

The ECB’s Pandemic Emergency Purchase Program aims to support the liquidity and the financial condition of all sectors of the Eurozone economy.1

This new temporary asset purchase program is focused on both private and public sector securities, which in addition to the €120 billion increase in the ECB’s €20 billion per month program of asset purchases announced last week2 amounts to 7.3 percent of euro area GDP. Purchases under the program will continue until at least the end of 2020, but may very well extend beyond this time frame should the ECB determine that the coronavirus pandemic remains in a phase of crisis. Christine Lagarde also noted that the ECB is fully prepared to increase the size and adjust the composition of this asset purchase program as and when needed.

Measures

While to date, no specific details have been published, the ECB has stated that asset categories eligible under the existing asset purchase program of the ECB (APP) would be similarly eligible under the PEPP, those being:

  1. Corporate Sector Purchase Program (CSPP);
  2. Public Sector Purchase Program (PSPP);
  3. Asset-Backed Securities Purchase Program (ABSPP); and
  4. Third Covered Bond Purchase Program (CBPP3).

The ECB also noted in its press release that it would waive the eligibility requirements for securities issued by the Greek government in respect of purchases under the PEPP.

The press release also indicated that for the purchases of public sector securities, the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks (i.e. broadly speaking, each national central bank’s share of the capital of the ECB). At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions,

The ECB has also committed to broadening the range of eligible assets under the existing CSPP to include commercial paper issued by non-financial institutions, making all commercial paper of 'sufficient credit quality' eligible for purchase under the CSPP. Purchases under the CSPP are conducted with counterparties that are eligible for the Eurosystem’s monetary policy operations; these are effectively Eurozone banks. It remains to be seen whether the ECB will relax this requirement to allow purchases to be made directly from corporate issuers.

The easing of collateral standards is also envisaged, in particular by expanding the scope of Additional Credit Claims (i.e. loans or other debt obligations which are not tradable bonds) that can be eligible for purchase under the PEPP.

In a bid to further encourage liquidity throughout the markets, the ECB will also make available up to €3 trillion through its refinancing operations, at interest rates as low as -0.75 percent.

ECB’s asset purchase plan and eligibility

The ECB’s Asset Purchase Programme (APP) consists of the four programs set out above, namely, the CSPP, PSPP, ABSPP and the CBPP3.

As noted above, it is envisaged that the criteria relevant for determining whether an asset is eligible to be purchased under the PEPP will be similar to those criteria currently applicable to each of the four programs under the APP.

It should be noted that, as a practical matter, it is not possible to consult with the ECB as to whether or not a given debt security that has not yet been issued will be eligible for use in the ECB’s monetary policy operations (including the APP). The ECB’s rules (Art 58(6) of Guideline (EU) 2015/510 of the European Central Bank) specifically prohibits giving guidance as to eligibility prior to issuance of the a debt instrument. The ECB does publish a list of all debt securities which have met its eligibility criteria, but such determination will not be made by the ECB prior to the relevant debt security being submitted to the ECB with a request for use of the same in its monetary policy operations. It is therefore very important to carefully structure any debt security intended to be used in monetary policy operations to comply with the ECB’s eligibility requirements.

We have set out some of the key eligibility criteria for the different APP programs in the table below. It should be noted that the table is not exhaustive and does not take account of the (as yet unpublished) relaxations of these criteria that may apply under the PEPP:

CSPP requirements

Issuer
  • The issuer has to be incorporated in the euro area (even if the ultimate parent is not based in the euro area, but if this is the case then all the other eligibility criteria will have to be satisfied).

The issuer cannot:

  • be a credit institution or have any parent undertaking (as defined in Article 4(15) of the Capital Requirements Regulation) which is a credit institution (as defined in Article 2(14) of Guideline ECB/2014/60);
  • have a parent company which is subject to banking supervision outside the euro area;
  • be an investment firm within the meaning of Article 4(1)(1) of Directive 2014/65/EU of the European Parliament and of the Council; 
  • be a supervised entity as defined in Article 2(2) of Regulation (EU) No. 468/2014 of the European Central Bank (ECB/2014/17) or a member of a supervised group as defined in Article 2(21) of Regulation (EU) No. 468/2014 (ECB/2014/17), in each case as contained in the list published by the ECB on its website in accordance with Article 49(1) of Regulation (EU) No. 468/2014 (ECB/2014/17), and may not be a subsidiary, as defined in Article 4(1)(16) of Regulation (EU) No. 575/2013, of any of those supervised entities or supervised groups;
  • be an entity, whether publicly or privately owned, that: (i) has as its main purpose the gradual divestment of its assets and the cessation of its business; or (ii) is an asset management or divestment entity established to support financial sector restructuring and/or resolution;
  • have issued an asset-backed security, a multi cédula, or a structured covered bond; and
  • be an eligible issuer for the PSPP.
Debt instruments
  • Must be euro denominated and have a minimum remaining maturity of six months and a maximum remaining maturity of less than 31 years (i.e. purchases of securities with a remaining maturity of 30 years and 364 days are possible) at the time they are bought.
  • The debt instruments issued by corporations must also comply with the eligibility criteria for marketable assets for Eurosystem credit operations (including being issued in New Global Note form (if bearer bonds) or being note issued through the new safekeeping structure (if registered bonds)).
Eligible counterparties
  •  Eurozone banks.
Credit assessment information
  • Only credit assessment information that is provided by an external credit assessment institution accepted within the Eurosystem credit assessment framework will be taken into account for the assessment of the credit quality requirements of the marketable debt instrument.

PSPP Requirements

Issuer
  • Issuers under the PSPP are central, regional or local governments of a Member State whose currency is the euro, recognised agencies located in the euro area, international organisations located in the euro area and multilateral development banks located in the euro area.
Debt instruments
  • Must comply with the eligibility criteria for marketable assets for Eurosystem credit operations pursuant to Part Four of Guideline (EU) 2015/510 of the European Central Bank (ECB/2014/60) subject to Article 1 of Decision (EU) 2016/702.
  • Must have a minimum remaining maturity of one year (i.e. purchases of securities with a remaining maturity of 364 days are NOT possible) and a maximum remaining maturity of less than 31 years (i.e. purchases of securities with a remaining maturity of 30 years and 364 days are possible).
Eligible counterparties
  • Eurozone banks.
  • Any other counterparties that are used by Eurosystem central banks for the investment of their euro-denominated investment portfolios.

ABSPP Requirements (Senior tranche only)

Issuer
  • An eligible issuer is an issuer of an asset backed security (ABS) which is established in the euro area.
  • The issuer is not an entity, whether publicly or privately owned, that: (a) has as its main purpose the gradual divestment of its assets and the cessation of its business; or (b) is an asset management or divestment entity established to support financial sector restructuring and/or resolution, including asset management vehicles resulting from a resolution action in the form of the application of an asset separation tool pursuant to Article 26 of Regulation (EU) No 806/2014 of the European Parliament and of the Council or national legislation implementing Article 42 of Directive 2014/59/EU of the European Parliament and of the Council.
ABS
  • Must comply with the eligibility criteria for eligible collateral under the collateral framework for Eurosystem credit operations. (including being issued in New Global Note form (if bearer bonds) or being note issued through the new safekeeping structure (if registered bonds)). An ABS that is eligible as collateral is not automatically also eligible for purchases under the ABSPP;
  • Must be euro denominated;
  • Must be secured by claims against non-financial private sector entities resident in the euro area of which a minimum share of 95 percent is euro denominated and of which a minimum share of 95 percent are resident in the euro area; and
  • Must have a second-best credit assessment of at least CQS3, currently equivalent to an ECAI rating of BBB-/Baa3/BBBL.

Note: The position on credit assessment is to apply slightly different criteria for ABSs with underlying claims against non-financial private sector entities resident in Greece or Cyprus.
Eligible counterparties
  • Eurozone banks.
  • Any other counterparties that are used by Eurosystem central banks for the investment of their euro-denominated investment portfolios.

CBPP3 Requirements

Issuer
  • An eligible issuer is a euro area credit institution or, in the case of multi-cédulas, by special purpose vehicles incorporated in the euro area.

The issuer must not be an entity, whether publicly or privately owned, that:

  • has as its main purpose the gradual divestment of its assets and the cessation of its business; or
  • is an asset management or divestment entity established to support financial sector restructuring and/or resolution.
  • The issuer of the covered bonds is not an entity, whether publicly or privately owned, that: (a) has as its main purpose the gradual divestment of its assets and the cessation of its business; or (b) is an asset management or divestment entity established to support financial sector restructuring and/or resolution, including asset management vehicles resulting from a resolution action in the form of the application of an asset separation tool pursuant to Article 26 of Regulation (EU) No. 806/2014 of the European Parliament and of the Council or national legislation implementing Article 42 of Directive 2014/59/EU of the European Parliament and of the Council.
Covered Bonds
  • Must be eligible under the collateral framework for Eurosystem credit operations (including being issued in New Global Note form (if bearer bonds) or being note issued through the new safekeeping structure (if registered bonds));
  • Must be euro denominated and held and settled in the euro area;
  • Must have underlying assets that include exposure to private and/or public entities; and
  • Must have a minimum first-best credit assessment equivalent to BBB-.

Note: The position on credit assessment is to apply slightly different criteria for covered bonds which currently do not achieve the CQS3 rating in Cyprus and Greece
Eligible counterparties
  • Eurozone banks.
  • Other counterparties that are used by Eurosystem central banks for the investment of their euro-denominated investment portfolios, including non-euro area counterparties active in covered bonds.

How we can help?

  • We can assist in reviewing the terms and structure of existing securities in relation to whether they may be eligible to subject to the PEPP purchases
  • We can assist with structuring and documenting new debt securities with a view to making the same eligible for participation in PEPP.

Further information

For further and more specific details of the requirements under these programs please either get in touch with a member of our team or visit the ECB’s website.

Footnotes



Contacts

David Shearer
David Shearer
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david.shearer@nortonrosefulbright.com
T: +44 (20) 74442215
James Stonebridge
James Stonebridge
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james.stonebridge@nortonrosefulbright.com
T: +44 (20) 74443449
Sarah Coucher
Sarah Coucher
Global Restructuring Strategy Director
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sarah.coucher@nortonrosefulbright.com
T: +44 (20) 74442005
Matthew Thorn
Matthew Thorn
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matthew.thorn@nortonrosefulbright.com
T: +44 (20) 74442683
Alan Bainbridge
Alan Bainbridge
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T: +44 (20) 74443279
Neha Khosla
Neha Khosla
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Chris Randall
Chris Randall
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Jon Perry
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Peter Young
Peter Young
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Kenneth Gray
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Oliver Sutter
Oliver Sutter
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