Finance news

The Bank of England’s $70 billion plan to spur lending by purchasing corporate bonds is aiming at the wrong targets because it won’t help borrowers that are shut out of debt markets, according to analysts.

“Buying investment-grade, non-financial corporate debt in the secondary market helps out investment funds and bank trading desks, but not the companies that actually need liquidity,” said Simon Surtees, who helps manage more than 18 billion pounds ($25 billion) at Gartmore Investment Ltd. in London. “I can’t honestly see what the Bank of England is trying to achieve.”

Governor Mervyn King said in February he’ll buy up to 50 billion pounds of debt “as soon as possible,” after cutting interest rates to a record failed to open debt capital markets to the companies that need cash most. The last borrower with non-investment grade ratings to sell bonds in pounds was Dutch electric-generation company Intergen NV in July 2007, when credit markets froze for all but the safest borrowers.

The bond-buying program comes after the central bank started to purchase commercial paper last month, and is the next stage toward so-called quantitative easing, where governments increase money supply to reduce its cost and stoke the economy. Policy makers are trying to ease access to funding after banks worldwide lost or wrote down $1.2 trillion since the start of the credit crisis.

A Bank of England spokesman, who declined to be identified citing policy, wouldn’t comment on the debt-buying plan. A spokesman for the U.K. Treasury referred inquiries about the bond purchases to the bank.

Dysfunctional Markets

Most investment-grade companies, those rated above Baa3 by Moody’s Investors Services and BBB- by Standard & Poor’s, can still sell bonds directly to investors. The central bank’s plan may be more effective targeting markets that aren’t functioning, such as bank debt or mortgage-backed bonds, according to Tim Barker, head of credit research at Aviva Investors in London.

Investment-grade companies including Tesco Plc, the U.K.’s biggest supermarket operator, and Imperial Tobacco Group Plc, the maker of West and JPS cigarettes, have sold 27.9 billion pounds of bonds in Britain’s currency this year, according to data compiled by Bloomberg. That’s almost three times the amount issued in the same period of 2008.

“If the Bank of England buys the exact same debt that everyone else is fighting frenetically to get their hands on, liquidity won’t return to the market as investors may not choose to invest in cheaper yet riskier assets,” said Lucette Yvernault, a portfolio manager at Schroder Investment Management Ltd car loans. in London.

Record-High Yield

Investors demand a record-high 25.4 percentage points over similar-maturity government bonds to hold speculative-grade U.K. borrowers’ debt, according to Merrill Lynch & Co.’s Sterling High-Yield Index. The benchmark includes 56 bonds issued by companies including British Airways Plc and drinks maker Allied Domecq Plc. That compares with the 6.15 percentage-point spread on investment-grade bonds, Merrill data show.

Buying just high-grade bonds “could exacerbate the current situation, where good companies that have non-cyclical earnings get even more highly bid, and those that don’t are still excluded” from debt markets, said Aviva’s Barker.

The central bank announced in a statement on Feb. 6 that it plans to buy corporate debt to “reduce liquidity premia on high-quality corporate bonds” and “remove obstacles” to companies seeking cash. The bank hasn’t published details of all the assets it plans to buy.

Interest-Rate Cuts

Policy makers have reduced the U.K.’s main interest rate from 5.75 percent to an all-time low of 1 percent since the end of 2007, and will cut it to 0.5 percent on March 5, according to the median forecast of 60 economists surveyed by Bloomberg News. Britain’s economy shrank 1.5 percent in the fourth quarter of last year, the biggest contraction since 1980, as consumer spending declined.

Credit-default swaps on U.K. government debt cost 153.5 basis points, according to CMA Datavision prices at 9:15 a.m. in London. That means it costs $153,500 a year to hedge against losses on $10 million of U.K. bonds for five years. The contracts, used to speculate on a borrower’s ability to repay debt, have risen 10-fold in the past year.

Chancellor of the Exchequer Alistair Darling suggested in an interview in the Daily Telegraph yesterday that the central bank could start quantitative easing, or printing money to buy bonds, as soon as this week.

“If the BOE’s plan doesn’t work, the funk we’re in will last considerably longer,” said Richard McGuire, senior fixed- income strategist at Royal Bank of Canada in London. “What’s at stake here is whether recession turns into depression.”

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