Canada: Corporate Bond Purchase Program

The Bank of Canada (BoC) announced in mid-April that it would activate a Corporate Bond Purchase Program (CBPP) (BoC 2020e) and formally launched the facility on May 26, 2020, to “support the liquidity and proper functioning of the corporate debt market” (BoC 2020f).

Policymakers established the CBPP as part of a broader suite of financial stabilization and liquidity provision measures that the BoC implemented in early 2020 in response to the COVID-19 pandemic. Other policies included (BoC 2020j):

• Lowering the target for the overnight rate by a cumulative 150 basis points to the effective lower bound of 0.25%;
• Launching the Bankers’ Acceptance Purchase Facility;
• Introducing a program to purchase Canada Mortgage Bonds in the secondary market;
• Introducing the Provincial Money Market Purchase Program;
• Introducing the Commercial Paper Purchase Program;
• Launching a program to purchase Government of Canada securities in the secondary market (minimum of CAD 5 billion per week, across the yield curve);
• Enhancing term repo operations;
• Coordinating with international policymakers for US-dollar liquidity and announcing that a US-dollar term repo facility would be made available on a contingency basis (should the need arise);
• Launching the Standing Term Liquidity Facility; and
• Launching the Contingent Term Repo Facility.

Paragraph 18(g) of the Bank of Canada Act gives the Bank of Canada broad discretion to buy and sell securities in normal times (18(g)(i))^FPrior to the Global Financial Crisis, the Bank of Canada Act limited the securities that the BoC could buy and sell in normal times to short-term (less than 180-day) credit endorsed, accepted, or issued by a bank (BoC 2004; BoC 2008). In 2008, Parliament broadened the scope of 18(g)(i) to allow the purchase or sale of any security issued by any person, other than equity interests. The 2008 revision also clarified that the BoC had this authority either “for the purposes of conducting monetary policy or promoting the stability of the Canadian financial system.” and in crisis times (18(g)(ii)).^FSubparagraph 18(g)(ii) allows the bank to purchase any security in a crisis “if the Governor is of the opinion that there is a severe and unusual stress on a financial market or the financial system” (Bank of Canada Act 1985). This power has been in the Act since 2001. Since 2008, the Act has allowed the bank to trade in virtually any security except equity interests in normal times; the crisis authority also extends to equities. The Act requires the Bank to establish and publish a policy statement describing how it will administer 18(g)(i).

To date, the Bank has never acted under the crisis authority in 18(g)(ii). Instead, the Bank justified all emergency measures during the pandemic crisis by revising its policy statement under 18(g)(i).

As mentioned in the Part of a Package key design decision, the BoC cut interest rates to 0.25% by the end of March 2020, a level the bank’s Governing Council considered the effective lower bound (BoC 2020i). Theoretically, hitting an effective lower bound renders stimulus attempts via monetary policy less effective, so the BoC created the CBPP and began purchasing government bonds to stimulate demand (Witmer and Yang 2016; Gravelle and Wilkins 2021).^FSee the YPFS Market Support case about the Government of Canada Bond Purchase Program. These purchases were the BoC’s first exercises in quantitative easing (BoC 2009; Hertzberg and Duarte 2020).

The BoC is required to release audited financial statements (Bank of Canada Act 1985). Section 28 of the Bank of Canada Act (1985) also enables the Minister of Finance to appoint BoC auditors and to require that those auditors report on bank affairs to the Minister “from time to time.”

CBPP purchases were transacted through a tender offer process (an auction), and eligible participants were given a list of eligible assets. The BoC required participants to submit their offers to sell eligible assets through authorized dealers. The dealers would then communicate those offers to TD Asset Management (TDAM), which acted as an agent for the BoC. Canadian Imperial Bank of Commerce Mellon held the assets as custodian. The BoC emphasized that it could change its administration strategy at any point during the CBPP’s operation (BoC 2020c).

BoC policymakers stated in the notice announcing the CBPP that a well-functioning Canadian-dollar corporate bond market, which was experiencing strains at the time, aids the broader Canadian economy because it helps firms access necessary longer-term finance to support their operations. Thus, by providing the needed liquidity, the BoC and the CBPP “serve[d] Canadians” (BoC 2020e).

The Bank of Canada Act requires the central bank to publish aggregate financial information about its assets and liabilities every week on its website (Bank of Canada Act 1985). The BoC published transaction-level data for the CBPP, and it published its aggregate corporate bond holdings by sector with a one-month lag (BoC 2020c), exceeding the Act’s requirements (Bank of Canada Act 1985).^FSee Annex 1 for detailed transaction-level data.

This key design decision does not apply to the CBPP.

BoC policymakers also stated that they could raise the limitation if market conditions warranted an expansion (BoC 2020e). The central bank announced that, on an issuer basis, the BoC would not hold more than 10% of the par value of eligible assets that were outstanding on April 15, 2020 (BoC 2020n).

CBPP utilization peaked at CAD 218 million of bonds on March 24, 2021, and purchases have slowed since as market conditions have improved (see Figure 2).

Source: Bank of Canada.

The BoC aimed to purchase bonds that would roughly reflect a reference portfolio based on sectoral shares of eligible assets outstanding (BoC 2020n). The central bank was largely successful, though its holdings of bonds from the communication sector were substantially smaller than the reference portfolio.^FThe BoC noted that the makeup would depend on market conditions and the specific assets offered to the BoC during the tender process (BoC 2020n). Bonds from the financial and energy sectors made up most of the BoC’s corporate bond holdings (see Figure 3).

The CBPP’s enactment (BoC 2021a), as well as the implementation of other asset purchase programs, rapidly expanded the BoC’s balance sheet during the worst part of the pandemic in 2020, from March to June, leaving the central bank’s ledger at historic highs (see Figure 4). CBPP purchases made up a small proportion of the growth.

Source: Bank of Canada.

The BoC and the Canadian government entered into an agreement by which the government would indemnify the central bank from losses resulting from asset sales through the CBPP, whereas gains on asset disposal would be remitted (BoC 2020m).

The BoC published a list of six eligible sectors and various bond issuers therein (BoC 2020b) (see Figure 5). Issuers from this list that experienced ratings downgrades and could no longer maintain at least one rating of BBB Mid/BBB/Baa2 or higher would continue to be eligible for the CBPP, but they had to have at least one rating of BBB Low/BBB-/Baa3 or higher (BoC 2020c).

Figure 5: List of Corporate Bond Purchase Program Eligible Sectors and Issuers

Months after BoC officials enacted the CBPP, the central bank on October 6, 2020, expanded eligibility to allow certain buy-side participants to offer bonds into the program (BoC 2020g). Participants had to either be a portfolio manager registered with a provincial securities commission or a federally or provincially regulated Canadian pension plan (BoC 2020a; BoC 2020g). These new participants had to submit their offers to the CBPP through eligible primary dealers (BoC 2020a; BoC 2020g).

Primary dealers for Government of Canada bonds that were previously approved by the BoC were eligible to facilitate the CBPP bond purchases. The eligible dealers were (BoC 2020n; BoC 2020h):

• BMO Nesbitt Burns Inc.;
• Casgrain & Company Limited;
• CIBC World Markets Inc.;
• Desjardins Securities Inc.;
• HSBC Securities (Canada) Inc.;
• Merrill Lynch Canada Inc.;
• Laurentian Bank Securities Inc.;
• National Bank Financial Inc.;
• RBC Dominion Securities Inc.;
• Scotia Capital Inc.; and
• Toronto-Dominion Bank.

For each tender process, the BoC provided eligible participants advance notice of assets eligible for CBPP purchase. Authorized dealers would communicate eligible participants’ offers to sell given amounts of eligible assets at a specified spread to a TDAM account that the BoC held (BoC 2020c).

BoC Deputy Governor Toni Gravelle said in March 2021 that the BoC had no plans to sell the corporate bonds on its balance sheet (Gravelle 2021).

The BoC aimed to purchase bonds that would roughly reflect a reference portfolio based on sectoral shares of eligible assets outstanding (BoC 2020n).

The bonds must have been included in the FTSE Canada 0+ Year Universe Bond Index Series. Eligible assets also had to have at least one rating of BBB Mid/BBB/Baa2 or higher for the senior unsecured rating or long-term foreign issuer credit rating assigned by any of DBRS Morningstar, Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, as of April 15, 2020. Bonds that were subsequently downgraded after April 15, 2020, and no longer retained at least one rating of BBB Mid/BBB/Baa2 or higher were still eligible for the program, given they retained at least one rating of BBB Low/BBB-/Baa3 or higher. However, if a participant failed to maintain at least one rating of BBB Low/BBB-/Baa3 or higher, it would lose participation eligibility (BoC 2020n).

The minimum tender amount per security was CAD 1 million par amount. Eligible assets had to have a remaining term to maturity of five years or less at the time of purchase (BoC 2020n).

Floating rate notes and sinking fund bonds were ineligible (BoC 2020n).

The central bank reserved the right to adjust its pricing and portfolio requirements as it deemed necessary (BoC 2020c). Further detail on the BoC’s pricing policy is unavailable with currently published BoC documentation.

Deputy Governor Gravelle said the BoC set “conservative reserve prices” below which the BoC would not purchase corporate bonds in an attempt to constrain the unwarranted use of the CBPP and other purchase facilities (Gravelle 2021, 5).

The BoC would not hold more than 10% of the par value of an eligible participant’s eligible assets outstanding on April 15, 2020. The overall program size was limited to a total of
CAD 10 billion of eligible assets (BoC 2020c).\

Details on how this spread was calculated and applied are unavailable with published BoC documentation (BoC 2020c).

This key design decision does not apply to the CBPP.

This key design decision does not apply to the CBPP.

This key design decision does not apply to the CBPP.

The BoC did not publicly publish any limitations on stock purchases or executive compensation.

This key design decision does not apply to the CBPP.

This key design decision does not apply to the CBPP.

At the end of March 2021, Deputy Governor Gravelle said corporate borrowers had “unfettered access” to “fully functional” debt markets, and thus, the BoC had no reason to extend the CBPP (Gravelle 2021, 6; BoC 2021b). He also said the BoC did not plan to sell any assets purchased through the CBPP (Gravelle 2021).