The U.K.'sExport Credits Guarantee Department, a government agency responsible for facilitating and insuring British export companies, is planning to make its first investment in structured credit products to hedge credit risk on its GBP20 billion (USD28.5 billion) contingent liability portfolio. The initiative follows a routine internal risk audit from more than a year ago, which led to the creation of an active portfolio management team charged with mitigating credit risk in the government-backed entity's portfolio, according to said Peter Rossington, senior manager for active portfolio management in London
"We are looking for a tailored solution that matches our needs, something more than a default swap," said Rossington. The institution is talking to potential counterparties, including investment banks and reinsurance companies. He declined to name them, saying only that discussions are at a delicate stage. "This is credit risk, we've always done interest-rate and foreign exchange-rate swaps connected to other activities, but this is a new initiative for the ECGB," he noted.
Rossington said the credit agency is looking for a reinsurance-type solution, which will eliminate the basis risk that would be part of a traditional credit derivative. Its portfolio is particularly exposed to countries such as China and sectors such as the airline industry, which accounts for 27% of its portfolio. "Historically export credit agencies have allowed these risks to build up on their books and get large concentrations of risk, which potentially creates financial imbalances [that] governments would have to pick up," Rossington noted. He declined to be more specific about what type of product the credit agency would buy.
