TransAlta, a Canadian energy company with more than USD7 billion in assets, is looking closely at buying credit-default protection on other energy companies. The company, Canada's largest non-regulated electricity generator, previously entered one default swap, about a year ago. It is now considering becoming a more active end user because the number of potential trading counterparties is dwindling, according to an official at the company in Calgary. "Credit and finding available energy counterparties to deal with is an issue right now," he said. "There are fewer and fewer counterparties to deal with. We haven't been in the market recently, but we may be in the future," he added.
A New York-based credit trader, said he is not surprised. "They really should all be doing it," he noted. The trader cautioned, however, that the interest may not translate into activity. "It's a nice thing in theory, but they're not credit traders, they're energy traders," he said, adding that the cost of protection on mid-BBB rated companies is often a deterrent and has forced other energy companies to continue warehousing counterparty risk.
The TransAlta official declined to reveal the generator's credit exposure or say at what level it would seek to strip out the credit risk. But he noted that external factors are causing TransAlta, which is an active user of over-the-counter energy derivatives, to examine whether it makes sense to hedge its counterparty risk now, simply because there are fewer counterparties. "If the market moves in your favor and a trade is a lot in the money, we may decide we're not comfortable with taking that much exposure to a counterparty," he said, explaining one instance that would prompt TransAlta to enter a default swap. "Alternatively, we could want to do a deal with a counterparty but we're not comfortable with their credit risk," he added.
Moody's Investors Service rates TransAlta Baa3 and Standard Poor's rates it BBB.
