Asset Purchase Facility: corporate bond sales programme – Market Notice 18 August 2022

Market Notice

The Corporate Bond Purchase Scheme (CBPS or the Scheme) was launched in August 2016 and expanded in 2020.

At its February 2022 meeting, the Monetary Policy Committee (MPC) asked the Bank of England (the Bank) to design a programme for selling corporate bonds held in the Asset Purchase Facility (APF), to be completed no earlier than towards the end of 2023. In May 2022, the Bank published a high-level Market Notice relating to the sale of corporate bonds held in the APF, confirming the main details of the approach.

This Market Notice sets out final operational details ahead of the start of the corporate bond sales programme in the week beginning 19 September 2022. It covers: (1) the Bank’s overall approach to the corporate bond unwind programme; (2) key parameters for sales auctions; (3) operational mechanisms for sales auctions; (4) details of how the Bank will handle any requests for debt buybacks or market tender offers from bond issuers; (5) details of what information the Bank will publish about the portfolio once the sales programme commences; and (6) the four-week sales operations cycle.

This Market Notice consolidates the currently effective provisions of previous Market Notices in relation to the Bank’s CBPS and so supersedes all previous Market Notices relevant to these operations.

1: Overall approach to unwind

In line with the MPC’s instructions, the Bank will aim to unwind in full the stock of CBPS holdings at the end of 2023, or in early 2024, subject to market conditions. As confirmed previously, this will happen via a combination of: bonds maturing; a programme of bond sales via auctions; and the potential for buybacks by bond issuers.

The stock of CBPS holdings in terms of initial purchase proceeds as of 3 August 2022 was £19.1 billion, with a nominal value of £14.5 billion. The maturity profile of these holdings is available on the Bank's website.

The primary method of sale will be a programme of regular multi-stock auctions. These will commence from the week beginning 19 September 2022, subject to market conditions at the time.

Only bonds that mature on or after 6 April 2024 will be eligible for sale via auctions in the first instance. Excluding those bonds maturing before this date, the nominal value of bonds eligible for sale via auctions is currently around £13 billion. The Bank will keep this maturity limit under review and reserves the right to adjust it as required.

The pace of auction sales will be gradual and responsive to prevailing market conditions, consistent with the MPC’s instructions to limit disruption to the functioning of the sterling corporate bond market.

In addition to its programme of auctions, the Bank will be open to offers from issuers who may wish to buy back their own bonds. The Bank will stand ready to conduct debt buybacks from the week beginning 17 October 2022, with the Bank considering offers from issuers on a case-by-case basis. For more details, see section (4) below.

The Bank will keep all aspects of its sales approach under review throughout the sales programme, and reserves the right to use other approaches at its sole discretion.

2: Key parameters for sales auctions

Sales process

The Bank will sell corporate bonds to the secondary market by holding multi-stock auctions.

The Bank will usually hold two auctions a week, on Tuesdays and Wednesdays from 11am to 11:30am^{footnote [1]}.

Each auction will be structured around bonds held within specific sectors as set out in the schedule of operations outlined in section (6) below and available on the Bank’s website. Bonds from all sectors will be offered weekly, with the exception of bonds from issuers in the Energy and Gas sectors, which will be offered fortnightly due to the relatively small weighting of these sectors within the overall portfolio.

Within each sector, bonds from each issuer group will be offered for sale fortnightly. Issuer groupings are published on the Bank’s website alongside the schedule of operations.

The Bank may elect to pause the sales programme to reflect periods of relative inactivity in the sterling bond market, such as late-December/early-January. Such break periods would be confirmed by the Bank in advance. In the first instance, the Bank will pause the sales programme on 8 December 2022 for four weeks, restarting sales in the week beginning 9 January 2023.

The Bank reserves the right to review and modify the structure of its sales operations, at its sole discretion, throughout the life of the sales programme.

Size of auctions

As was the case during purchases, the Bank will not publish a specific target size for each sale auction. Instead, the size of individual auctions will adjust automatically to reflect the quantity and quality of the bids received. The pace of sales is expected to fluctuate around an average, reflecting factors such as seasonality and market conditions.

The Bank will calibrate the overall amount available in its auctions to meet its target timescale for unwinding the CBPS. Based on the initial nominal value of the portfolio available for sale, the auction programme might be expected to deliver sales at an average pace of around £200 million nominal per week. The Bank may adjust this over time to reflect the remaining stock of holdings as the programme progresses.

The maximum amount of any individual bond available for sale in each auction will be subject to a cap, in order to prevent an excessive concentration of sales. For bonds with an outstanding amount greater than £100 million, the cap will be set initially at a nominal value equal to the 5% of the total nominal outstanding for the bond. For bonds with an outstanding amount below £100 million, the full amount held in the CBPS will be available for sale.

This cap is not a target for the Bank to sell in each auction, rather it is an upper limit on the extent of bids that the Bank will accept in any individual bond.

3: Operational mechanisms for corporate bond sales auctions

Transaction process

In its auctions, the Bank will seek bids as a spread to a specified reference gilt.

Bids 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 bid is allocated at the highest accepted spread for that bond (the clearing spread). Bids at the clearing spread may be pro-rated.

The Bank will, for each bond, set an internal maximum (or ‘reserve’) spread and will not typically sell bonds at bids above this spread. Successful bids below the Bank’s maximum spread will be allocated based on the attractiveness of those bids across bonds within each auction, subject to the total sales per bond not exceeding the per-bond cap described in section (2).

In setting its reserve spreads, the Bank will have regard to the diversification of the remaining portfolio across factors including sector shares, climate characteristics and liquidity. However, the Bank will not target specific sector shares at points in time, as it did during the purchase phases of the CBPS.

The Bank will reserve the right to reject any bids, at its sole discretion, including in light of other bids received.

Publication of auction details

The Bank will publish on its wire services page (see Reuters BOE/Markets1; Bloomberg BOEO 1) and on the Bank’s website each Friday at 11am the indicative list of bonds that will be available for sale during the following week’s operations, together with the reference gilt for each bond.

The list of bonds available for sale, and the related reference gilts, will be published on the Bank’s wire services page, and on the Bank’s website, on the day of the auction at 9am.

Submission of bids

Auctions will be run via the Bank’s electronic tendering system, Btender. Bids should be submitted using Btender between 11am and 11.30am.

Bids must be expressed as a basis point spread to the relevant reference gilt (as published at 9am on the day of the auction), in increments of whole basis points. The minimum bid size for an individual bond is £1 million nominal and the bid should be expressed in increments of £0.1 million nominal.

The Bank may, at its discretion, take bids 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 bond, the nominal amount bid, and a spread to the reference gilt;
• counterparties should make no more than three bids for an individual bond in a single operation and no more than fifteen bids in total in a single operation; and
• if submitting multiple bids across the operation, counterparties should also provide the weighted average spread of those offers to 3 decimal places to act as a check. That is, the sum across all bids of the nominal bid size multiplied by the spread for each bid, divided by the total nominal value of bids.

The reference gilt yields for each bond will be set at the mid-yields, as published by TradeWeb, at 11:45am.

Results & settlement

The Bank will reveal to participants in Btender their allocation of bids as soon as possible following 11:45am. The minimum allocation amount per successful bid is £0.1 million nominal and allocation amounts will be expressed to participants in increments of £0.1 million nominal.

The corporate bond sales 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 Operating Procedures, which provide more detail on the operational and settlement procedures. As described more fully in the APF Terms and Conditions, the Bank retains discretion to make any amendments it sees fit in relation to the Scheme.^{footnote [2]} Such amendments may be made in relation to an individual counterparty or a group of counterparties.

Eligible counterparties and applications

The Bank will sell bonds via firms that the Bank is satisfied are market makers in such bonds and are counterparties in its Open Market Operations. Counterparties must have access to Btender in order to participate in CBPS auctions.

Those wishing to participate as counterparties in the sales of the CBPS must complete the Expression of Interest form for the Scheme available on the Information for applicants page and submit it by email to applications@bankofengland.co.uk. The Bank reserves the right to reject applications at its sole discretion.

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

Participation will be governed by the APF Terms and Conditions (as may be amended by the Bank from time to time).

Treatment of small residual holdings

On occasion, allocations during an auction may result in the Bank’s remaining holdings being smaller than a typical market trade size. In order to avoid this, the Bank may at its sole discretion elect to offer the remaining amount to allocated counterparties at the same price determined in the auction, after the auction results are published.

Specifically, where an auction results in a residual holding in the CBPS of less than £1 million of nominal, the Bank may at its sole discretion approach allocated counterparties after publication of the auction results, to offer the residual holding at a spread to the specified reference gilt yield equal to the clearing spread determined by the auction. The reference gilt yield will remain as the mid-yield as published by TradeWeb at 11.45am.

In the event an allocation is pro-rated across two or more counterparties, the Bank will initially approach the counterparty that received the largest allocation. The counterparty has the right to reject the Bank’s offer of the residual holding. The Bank would then approach the next allocated party, who also has the right to reject the Bank’s offer of the residual holding.

Sales of residual holdings will normally settle on a T+2 basis, in line with settlement of sales in the Bank’s auctions.

4: Buybacks and open market tender offers by bond issuers

In its 5 May 2022 Market Notice, the Bank announced that it was open (i) to receiving expressions of interest from issuers who may wish to buy back their own bonds and (ii) to considering participation in any open market tender offers launched by issuers. This will provide additional routes for the Bank to complete its unwind programme to meet the MPC’s instructions, and opportunities for issuers to participate in the unwind process alongside end investors. It applies to all bonds held in the CBPS, including those maturing on or before 5 April 2024.

Any such buyback offers or tenders will be considered on a case-by-case basis by the Bank, taking into account the pricing available and the Bank’s internal risk framework. Offers will be evaluated against the same pricing framework that the Bank operates for auctions, and buybacks will be conducted at prices no lower than the Bank would be willing to accept in its open auctions. In line with usual market practice and to protect value in the APF, offers made at a premium to market prices will be more likely to be accepted.

The Bank reserves the right to accept or decline such requests for buybacks at its sole discretion.

Timetable for issuer bond buybacks

The Bank will stand ready to conduct bond buybacks during specified execution windows from the week beginning 17 October 2022. These will be on Thursdays, with specific dates varying according to the same issuer grouping used for auctions. The schedule of operations detailing the auctions cycle can be found in section (6) below and on the Bank’s website. Issuers may only seek to execute buybacks during the relevant execution window, as outlined in the schedule of operations.

Expressions of interest in issuer bond buybacks

Issuers interested in undertaking bond buybacks of their own bonds should initially submit an expression of interest to the Bank. Further information on how to submit an expression of interest can be found on the Bank’s website.

Once received, the Bank will disclose to the issuer on a strictly confidential basis the nominal size of the Bank’s holdings, within a sizing range, to aid the issuer in its decision on whether to proceed with the buyback(s). To execute the buyback(s), the issuer must appoint a bank as an intermediary.

Submission of requests for issuer bond buybacks

Issuers that wish to proceed to make a formal buyback offer should complete an Eligible Bond-Buyback Request form (Buyback Request form), which is available on the Information for participants page of the Bank’s website, stating the nominal value the issuer wishes to buy back and the bid as a spread to the relevant reference gilt.

As part of this request, issuers will be required to nominate an intermediary bank to act on its behalf in the proposed transaction.

Issuers should submit the Buyback Request form via their intermediary bank to CBPSissuerbuybacks@bankofengland.co.uk no later than five London business days before the requested execution date.

Upon receipt of the Buyback Request form, the Bank will consider the terms of the proposed bond buyback(s) and will confirm to the intermediary bank whether the proposal will be accepted no later than 6pm one London business day before the requested execution date.

Both the Bank and the intermediary bank acting on behalf of the issuer reserve the right to terminate the bond buyback request at any point until 6pm on the London business day before the execution date.

Where the Bank accepts the proposed buyback and has not received notice of a withdrawal of the proposal by 6pm on the London business day before the execution date, the terms shall be considered agreed and final. The Bank will determine whether it has received a valid notice of withdrawal from the issuer on time at its sole discretion.

Execution of buybacks

Where a buyback request is agreed as described above, the final price will be determined by the Bank on the execution day, based on the mid-yield of the reference gilt as published by TradeWeb at 11.45am, plus the spread as agreed between the Bank and the intermediary bank.

Bilateral bond buybacks will normally settle on a T+2 basis.

Market communications in relation to issuer bond buybacks

Issuers undertaking bond buybacks with the Bank should note that they remain responsible for any market communication that may be required by relevant market regulations and laws in relation to the proposal or undertaking of such buyback transactions.

The Bank does not intend to make separate announcements relating to any individual buybacks completed or open market tender offers it may participate in. Any reduction in the stock of CBPS holdings as a result of such transactions will be communicated as part of the Bank’s regular published information, as set out in section (5), but information on issuer buybacks will not be distinguished separately.

Eligible counterparties for issuer bond buybacks

Eligible CBPS counterparties who wish to act as an intermediary bank for bond buybacks should contact applications@bankofengland.co.uk.

Upon receiving expression of interest for a buyback from an issuer, the Bank will offer to share bilaterally a list of those CBPS counterparty banks that have expressed an interest in acting as an intermediary bank for buybacks.

The Bank is not involved in, nor does it accept any responsibility, and disclaims all liability (whether arising in tort or contract or otherwise) which it might otherwise have, in relation to, any arrangement between an issuer wishing to participate in a debt buyback and any intermediary.

5: Published information

The Bank currently publishes each Thursday at 3pm on the Bank’s website and wires services, the aggregate stock of APF corporate bonds, in terms of initial purchase proceeds. These data are as at the first Wednesday of each month on a settlement date basis.

With effect from Thursday 29 September 2022 until the completion of the corporate bond sales programme, the Bank will publish the aggregate stock of APF corporate bonds on a weekly basis, in terms of both initial purchase proceeds and nominal value of residual holdings.

The Bank will publish an updated list of ISINs available for sale on the Bank’s website at 3pm on Thursday 15 September 2022, and every fourth Thursday thereafter.

6: Four week corporate bond sales operations cycle