Asset Purchase Facility (APF): Corporate Bond Purchase Scheme Reinvestment programme – Market Notice 5 November 2021

This Market Notice describes the operation of the Bank of England’s Corporate Bond Purchase Scheme, including the approach to greening. It consolidates the currently effective provisions of previous Market Notices in relation to the Bank’s Corporate Bond Purchase Scheme and so replaces all previous Market Notices relevant to these operations.
Published on 05 November 2021

The Corporate Bond Purchase Scheme (CBPS or the Scheme) was launched in August 2016 and expanded in 2020. It imparts monetary stimulus by lowering the yields on corporate bonds, thereby reducing the cost of borrowing for companies, by triggering portfolio rebalancing into riskier assets by sellers of assets and by stimulating new issuance of corporate bonds. Since March 2020, the MPC has voted to maintain the stock of corporate bond purchases at £20 billion.

Following the Chancellor’s decision to update the MPC’s remit in March 2021, and as re-affirmed in the latest remit issued in October 2021, the Committee is expected to support, subject to maintaining price stability, the government’s economic policy. The government’s economic strategy, to achieve its policy objective, includes supporting the transition to a net zero economy. In line with that remit, this reinvestment programme will be the first to take the climate impact of the issuers of bonds into account. The approach to greening is summarised below, but is set out in detail in material published separately on 5 November.

As explained in the minutes of the MPC meeting ending on 22 September 2021, in order to return the aggregate APF stock of corporate bonds up to £20 billion, the Bank will reinvest the cash flows associated with reductions in the stock of sterling non-financial corporate bond purchases held by the APF back into eligible corporate bonds. The Bank will undertake reinvestment operations via reverse auctions over several weeks beginning 24 November 2021, with a break over the holiday season. Operations will stop after the 16 December operation and resume on 5 January.

As set out when the CBPS was launched in 2016, the Scheme is “designed to purchase a balanced portfolio of bonds across eligible issuers and sectors”. Due to changes in the composition of CBPS-eligible issuance, sector shares of outstanding issuance have changed since they were last published in September 2020. And as the stock of sterling corporate bonds held by the APF has reduced over time the Scheme’s holdings no longer match the representative sector shares. The Bank is today publishing an updated eligibility list and representative sector shares, alongside an update on the Scheme’s holdings.

The reinvestment programme will aim to return the CBPS portfolio towards a balanced portfolio by purchasing bonds in those sectors that are underweight relative to the updated sector shares. The Bank will aim to purchase proportionally more bonds in the sectors that are most underweight. Following the final reverse auction of this reinvestment programme the Bank will announce the completion of this reinvestment programme on its wire services page (see Reuters BOE/Markets1; Bloomberg BOEO 1). Following the completion of this reinvestment programme the Bank will publish updated representative sector shares, and the Scheme’s holdings, for each sector.

Eligibility

The Bank will purchase bonds issued by companies (including their finance subsidiaries) that make a material contribution to economic activity in the UK, subject to the restrictions set out below. The Bank will consider a number of factors in making its eligibility decisions. Companies with significant employment in the UK or with their headquarters in the UK will normally be regarded as meeting this requirement, but the Bank will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.

Corporate bonds issued by banks, building societies, insurance companies and other financial sector entities regulated by the Bank or the Financial Conduct Authority will not be eligible. Bonds will also not be eligible if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.

Our approach to Greening

As part of greening the CBPS, the Bank, for the first time, will take into account the climate impact of the issuers of bonds. The Bank is also today publishing a web page providing more detail on our greening approach, which centres on three high-level principles: (1) that we will incentivise firms to take decisive actions that support an orderly transition to net zero; (2) that we will lead by example, while learning from others, and; (3) that we will ratchet up our requirements over time as data and metrics improve.

We will put these principles into action by using four tools, calibrated to complement each other. These tools are (1) targets (2) eligibility criteria (3) tilting and (4) escalation.

The additional climate-related eligibility requirements imposed at this time are as follows:

  • Firms in high-emitting sectors (energy, electricity, gas and water) must have published an emissions reduction target, in order to be eligible for purchase
  • Firms which generate any revenue from mining thermal coal will be ineligible.
  • Additionally, firms which generate any revenue from using thermal coal will be ineligible for purchase by the CBPS, unless they meet all of the following criteria:
    • No investment in new unabated thermal coal plants, with commitments to eliminate existing activity in the UK by 2025 and globally by 2030;
    • Emissions falling over time consistent with appropriate sectoral net zero pathwaysfootnote [1]
    • At least 20% of energy mix comprised of renewable energy.footnote [2]

Firms that meet these eligibility criteria, in addition to those already in place, will be eligible for purchase. Purchases will then be “tilted” or skewed within sectors towards the debt of eligible firms that are performing relatively strongly in support of net zero - and responding most to the incentives we are setting – and away from those who are not. A scorecard allocating firms to different climate buckets will be used to assess their performance across multiple climate metrics, and to drive our investment decisions via the price the CBPS is prepared to pay for an eligible issuer’s bonds.

Eligible securities

The Bank will offer to purchase sterling corporate bonds of eligible issuers, with the following characteristics:

  • Conventional senior unsecured or secured, unsubordinated debt.
  • Bonds rated investment grade by at least one major rating agency and subject to the Bank’s assessment process.
  • Cleared and settled through Euroclear and/or Clearstream.
  • Minimum amount in issue of £100 million.
  • Minimum residual maturity of twelve months; no perpetual debt.
  • At least one month since the security was issued.
  • Securities will need to be admitted to official listing on the London Stock Exchange (LSE) or an EU stock exchange or, in the Bank’s discretion, on a multi-lateral trading facility operated by the LSE or by a recognised stock exchange regulated in the EEA.

Bonds with complex or non-standard structures will not be eligible. Convertible or exchangeable bonds will not be eligible.

Corporate bonds that contain a “Spens clause” will normally be eligible.footnote [3] Bonds with standard par call options within 3 months of maturity and those containing modified Spens or make-whole clauses will also normally be eligible provided the size of early repayment margin applicable is within the Bank’s risk tolerance. Other corporate bonds that contain callable features will not normally be eligible.

Securities issued by a finance subsidiary will normally require a guarantee from within the issuer’s group. The Bank reserves the right to require a parent company guarantee in a form and substance satisfactory to the Bank.

The Bank has allocated each bond that is currently eligible for purchase to a sector, using a common sector classification, as indicated in the published eligibility list. The Bank’s approach continues to involve aiming to purchase bonds such that the Scheme’s holdings are representative of each sector’s share – in terms of the face value of bonds outstanding – of the list of eligible bonds. The Bank will also seek to avoid over-concentration in particular sectors or issuers and may choose not to make purchases of particular sectors or issuers for any reason at any time, including where the Bank is unable to make a purchase owing to applicable law and regulation. The Bank will keep its approach to targeting these sector shares under review in light of general market conditions and its experience of operating the Scheme, including the liquidity of individual sectors.

The Bank will keep the eligibility criteria under review. The Bank will reserve the right in its sole discretion to deem any security ineligible for any reason, including deeming securities ineligible, or ceasing purchase of securities, that it has previously offered to purchase.

Eligible counterparties and applications

The Bank will offer to make purchases of investment grade sterling denominated bonds only via firms that the Bank is satisfied are market makers in such securities and are counterparties in its Open Market Operations. Counterparties must have access to the Bank’s electronic tendering system, Btender, in order to participate in CBPS reverse auctions.

Those wishing to participate as counterparties in the Scheme must complete the Expression of Interest for the Corporate Bond Purchase Scheme available on the Information for participants page and submit it by email to Applications@bankofengland.co.uk. The Bank reserves the right to reject applications without explanation.

As a condition of participation in the Scheme, counterparties will be asked to send to the Bank quotes on eligible securities that are sent in the normal course of their business (‘dealer runs’) as well as indications of bonds which they would like to sell or take a position (‘dealer axes’). Further details are provided in the APF Operating Procedures. Eligible counterparties for the 2021 reinvestment do not need to apply.

Participation will be governed by the Terms and Conditions for the Asset Purchase Facility.

Operating parameters

Purchase process

The Bank will participate in the secondary market by holding reverse auction operations. The Bank intends to hold two purchase operations a week, on Wednesdays and Thursdays. The Bank will structure each auction around bonds issued by firms from certain sectors and will include each eligible security from those sectors in an auction at least once a week.

The Bank reserves the right to modify the structure of its purchase operations or to carry out secondary market purchases via other methods, such as bilateral purchases, should it be deemed necessary.

As in previous CBPS programmes, the MPC will keep under review the case for participating in the primary market.

Size of operations

The Bank will look to purchase, via the CBPS, an amount of corporate bonds in order to return the aggregate APF stock of corporate bonds up to £20 billion. The purchase pace is intended over time to be consistent with this target, but may fluctuate above or below it depending on seasonality, market conditions and the pattern of offers received in operations.

In each purchase operation, the Bank will initially stand ready to purchase up to £20 million nominal of each bond.

Operational Mechanism – Transaction process

In its auctions, the Bank will seek offers as a spread to a specified reference gilt. Offers will be allocated on a uniform spread basis so that all successful transactions for any individual bond will be allotted at the same single spread. In a uniform format every successful offer is allocated at the highest accepted price for that bond. Offers at the clearing spread may be pro-rated. The Bank will reserve the right to reject any offers, for any reason, including in light of other offers received.

The Bank will, for each security, privately set a minimum spread to the yield on a specified reference gilt. It will not purchase securities at offers below this spread.

Successful offers above the Bank’s minimum spread will be allocated based on their attractiveness across bonds within each auction until the quantity that the Bank is willing to purchase has been reached.

In order to ensure purchases are representative of issuance, the Bank will adjust the minimum spread it sets in order to increase or decrease the pace of purchase.

Operational Mechanism – Submission of offers

The Bank will announce on its wire services page (see Reuters BOE/Markets1; Bloomberg BOEO 1) and on the Bank’s website each Friday at 4pm the list of eligible securities for which the Bank will invite offers during the following week’s operations, along with the reference gilt for each security.

The list of eligible securities, along with the reference gilt for each security, will be published on the Bank’s wire services pages, and on the Bank’s website, on the day of the auction at 9am.

Offers should be submitted using Btender between 11am and 11.30am.

Offers must be expressed as the basis point spread to the relevant reference gilt, in increments of whole basis points. The minimum offer size for an individual security is £1 million nominal, the offer should be expressed in increments of £0.1 million nominal.

The Bank may, at its discretion, take offers submitted by phone, Bloomberg IB, or via email to the Bank’s Sterling dealing desk during an operation, using the phone number and email address provided to counterparties by the Bank. In this event, counterparties:

  • must provide the specified ticker of the security; the nominal amount offered; and a spread to the reference gilt.
  • should make no more than three offers for an individual security in a single operation and no more than fifteen offers in total in a single operation.
  • submitting multiple offers across the operation should also provide the weighted average spread of those offers to 3 decimal places. That is, the sum across all offers of the nominal offer size multiplied by the spread for each offer, divided by the total nominal value of offers.

Reference gilt yields will be set for each bond as the mid-yields as published by TradeWeb, at 11.45am.

The Bank will reveal to participants in Btender their allocation of offers as soon as possible following 11.45am. The minimum allocation amount per successful offer is £0.1 million nominal and allocation amounts will be expressed to participants in increments of £0.1 million nominal.

The corporate bond purchases will normally settle on a T+2 basis.

The Bank reserves the right to cancel an auction at any time before the results are published. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a subsequent day.

All counterparties must comply with the APF Operational Procedures, which provide more detail on the operational and settlement procedures.

As described more fully in the Terms and Conditions, the Bank retains discretion to make any amendments it sees fit in relation to the CBPS. Such amendments may be made in relation to an individual counterparty or a group of counterparties.

Published information

The Bank currently publishes the aggregate total stock of APF corporate bonds as at the first Thursday of each month at 3pm on the Bank’s website and wires services.

The Bank will publish the aggregate stock updated on a weekly basis commencing 11 November 2021 until the completion of this reinvestment programme.

  1. Greenhouse gas emissions on a Scope 1 plus Scope 2 basis.

  2. Energy mix refers to having at least 20% of output or capacity from renewable sources.

  3. These provide that on early redemption a cash payment is made to the bond holders that is the higher of the outstanding principal and the foregone interest and principal payments discounted at a rate equal to the redemption yield of a gilt of comparable maturity.

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