Ericsson is taking its first step toward using credit derivatives by preparing a business case to take to its board for approval. With credit derivatives now sufficiently liquid for corporates to consider hedging, the Swedish telecom company wants to enter the market, said Stefan Daberius, head of markets at Ericsson Treasury Services in Stockholm.
Ericsson Treasury Services, its financial management unit, is a sophisticated treasury which already hedges interest rates and currencies and actively manages a diversified investment portfolio.
Daberius said, "We understand that there are good products out there." He added, "It's a question of how we use them and where." These are the questions the corporate will look to answer in the business case it prepares for the board. Daberius declined to comment on the likelihood of board approval, or on a possible time-scale.
The firm has credit risk on several levels, including country and individual risk, and manufacturing risk, explained Daberius. Ericsson may consider buying credit-default swaps on sovereign debt, for example, which can be used by corporates to protect investments in foreign countries from the effect of a national default. The Swedish firm also has a treasury cash pool of SEK72.6 billion (USD10.44 billion) which is invested across asset classes. CDS or iTraxx index products could also be used to hedge bond investments in the portfolio, added Daberius.
Ericsson is talking to several banks about credit products. Daberius explained Ericsson has a list of banks with which it does most of its financial markets business, but he declined to name them. "They are trying to sell this to us quite aggressively," he said. "We need to have a good business case," he added. "We need to ask, 'Is [credit hedging] adding value?'" explained Daberius.
The corporate actively trades some derivative instruments such as currency options. "I don't see us using [credit derivatives] as a trading tool," said Daberius.
He noted the introduction of International Accounting Standards, which require corporates to match hedges to liabilities, means corporates are being more careful about their use of derivatives. If hedge accounting is not possible for Ericsson's use of credit derivatives, the firm needs to establish if the instruments will still be valuable, said Daberius.
Wolfgang Draack, senior v.p. at Moody's Investors Service in Frankfurt, said, "The more [Ericsson] reduces the volatility in their asset base, the better for their rating." He added, "Overall risk management is a key factor in our ratings." A sales official at a German bank said corporate use of credit derivatives is rising, but they are not as quick to enter trades as financial institutions. "They're beginning to realize it's a useful instrument," said the official.
