Scania, a Swedish automaker with a EUR7 billion (USD6.2 billion) balance sheet, may soon purchase its first credit derivative to hedge credit risk in its leasing portfolio. The increasing homogenization of the European truck market is causing the maker of long-haul trucks to incur more concentrated credit risk, said Jan Bergman, head of the treasury in Södertälje. "We now have some U.K. and Dutch companies that are active in the whole of Europe and when they want to buy trucks, they may want to buy 500 trucks instead of two or three [as in the past], which is where you get the exposure," he said. Scania has a diversified leasing portfolio of EUR2.7 billion, although he declined to speculate how much of this would need to be hedged or give further details about the portfolio.
Scania has spoken to its relationship banks, which Bergman declined to name, about the use of credit derivatives but has yet to pull the trigger because available products don't fit its needs. "They talk a lot about it, but very few are willing" to offer appropriately priced instruments, he said.
The first investment would likely involve buying protection through a credit-default swap on one of the larger companies that Scania has exposure to, such as Stagecoach Group of Perth, U.K. Bergman noted this is because Scania's credit risk is growing to the larger companies and these are also the ones that are likely to have outstanding bonds and thus reasonably priced default swaps.
Whatever it does, Scania will likely not enter the credit derivatives market until after the International Swaps and Derivatives Association has hashed out its new credit derivatives definitions, which is expected to happen later this year. Bergman noted that in the interest-rate market, for example, ISDA's definitions are quite clear, but said there remains some ambiguity in credit contracts that he would like to see resolved before participating. "It's not really completed on the credit side yet," he said.
Scania selects counterparties from a core of roughly six relationship banks based on price. Bergman declined to name potential credit counterparties.
