Get all your news in one place.

100’s of premium titles.
One app.

Start reading

Get all your news in one place.

100’s of premium titles. One news app.

Start reading

The Guardian - UK

Business

Patrick Collinson

Bank of England extends QE to overseas firms

Tim Cook unveils the new iPhone 7 AirPod headphones. Apple may benefit from Bank of Englasnd bond buying. Photograph: Xinhua/REX/Shutterstock

The Bank of England is to buy £10bn of bonds issued by private companies, including Apple and other overseas corporations, as it begins a dramatic expansion of its quantitative easing programme.

But the Bank has been accused of handing taxpayer cash to foreign corporations with little connection to the UK, which may simply hand the money back to shareholders.

Until now, QE, designed to boost the economy by lowering interest rates, has focused on purchasing and, in effect, cancelling UK government bonds, known as gilts. The Bank said earlier this year, however, that it would expand its asset purchases to £10bn of bonds issued by private companies, as long as they were UK based, or overseas corporations with a major UK presence which were benefiting the British economy.

When the list of eligible companies was published on Monday, one major bond dealer said he was astonished at the names included.

Verizon, a US cell phone network, is on the list, as is another big US telecoms company, AT&T, despite both firms arguably having minimal operations in the UK.

While most bonds are issued by companies so they can invest in their businesses, some US corporations have recently used the bond markets to raise cash simply to hand to shareholders as dividends, or to use it to buy shares in their own company, thus pushing up the share price artificially.

“A lot of US corporates have been issuing bonds to finance share buybacks and dividends to shareholders. There can be absolutely no guarantee that the funds raised will be used to invest in the UK,” one senior bond dealer said, on condition of anonymity.

The Bank has said it will only buy the bonds of companies “making a material contribution to the UK economy”.

It defines these companies as those with “significant employment in the UK or with their headquarters in the UK ... 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.”

It said its asset purchase facility corporate bond purchase scheme (CBPS) would stimulate the economy 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”.

Bonds with a face value of about £110bn will be eligible for buying by the Bank, although the central bank is only planning to buy £10bn of these bonds.

However, the senior trader said: “I was incensed when I saw the list and how far it appears to deviate from the aim of the scheme. There are huge inconsistencies in the names included. Apple is on the list, as is Wal-Mart, but at least they own Asda. Manchester airport is on the list, but Gatwick airport is not.”

“If a company name is on that list, it will bring it substantial benefits when issuing new bonds and securing new funding,” he added.

The trader accused other investment banks of gaming the system to their own benefit. “My motivation in trying to expose this is that I am a British taxpayer and I am not happy about seeing the public purse being used to the advantage of certain investment banks.”

The Bank of England declined to comment.