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Bank of America: Here's One Way the ECB's Bond Buying Could Come to an End

A wave of LBOs amid exuberant credit markets.

The only thing that can gatecrash the European Central Bank bond-buying-spurred credit party is ... the European Central Bank bond-buying program itself?

That's the conclusion drawn by Bank of America Corp. analysts who argue that the ECB's Corporate Sector Purchase Programme (CSPP) could lower company borrowing costs to levels that would spark a wave of leveraged buyouts (LBOs), creating volatility in credit spreads that could shake investors' faith in the central bank and confidence in the market.

The CSPP could "quickly become its own worst enemy if it leads to a rapid rise in releveraging", the analysts, led by Barnaby Martin, write.

A deluge of LBOs, which involve the acquisition of a public-listed company using a significant portion of borrowed money to take it private, would be just the latest in a string of symptoms suggesting over-exuberant credit markets. This week, for instance, saw the first sale of negative-yielding debt by non-financial companies after Sanofi, a French drugmaker, and Henkel AG, a German household products maker, issued benchmark deals with a yield of minus 0.05 percentage points for three- and two-year notes, respectively.

Such ultra-low yields on corporate bonds could encourage private-equity firms and financial sponsors to drive an uptick in debt-financed buyouts with such a trend inevitably causing a deterioration in target companies' creditworthiness and, as such, take some investment-grade firms into junk territory. In...