RBA Expands Corporate Bond Repurchasing Program

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RBA Expands Corporate Bond Repurchasing Program

The Reserve Bank of Australia has broadened the range of corporate debt securities that are eligible as collateral for domestic market operations to include non-bank, investment grade securities, to assist with the smooth functioning of Australian capital markets.

Reserve Bank Governor Philip Lowe, following its monthly meeting on Tuesday, announced that corporate bonds with credit ratings as low as BBB- would now be considered as collateral in the central bank’s repurchasing agreements (repo) that are designed to supply liquidity to financial markets.

“For long-term corporate debt securities, the minimum criteria corresponds to an average credit rating of BBB-,” Governor Lowe said in a statement.

“For short-term corporate debt securities, the minimum criteria corresponds to an average credit rating of A-3.

“Previously, the minimum requirements for repo eligibility were an average credit rating of AAA for long-term corporate securities and A-1 for short-term corporate securities.”

In other words, the RBA is prepared to buy the bonds, providing liquidity to the market and giving investors certainty that they can sell them.

Corporate bonds issued by banks and other financial institutions are already repo eligible.

The announcement levels the playing field and will inject confidence into the market.

The line between the ‘haves’ and the ‘have nots’ between investment grade and non-investment grade bonds is further distinguished.

This is an extreme measure for extreme times and highlights elevated market risk.

To qualify for the repo scheme, bonds must be rated by two recognised credit rating agencies and companies need to apply for consideration.

 

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