Volvo Treasury, a subsidiary of the Swedish car manufacturer, plans to use credit derivatives for the first time to hedge counterparty risk on its financial liabilities and expects to enter its debut transaction after the summer vacation. Magnus Jarlen, manager of risk control in Gothenburg, said it will hedge risk originating from loans to partly owned subsidiaries. It may also hedge sovereign risk, for example, if the company decided to build a car plant in Eastern Europe it would consider taking out credit protection on the sovereign. He declined to detail the size of its financial liabilities.
Jarlen said officials at the company have met with bankers--who he declined to name--to discuss the hedging plan. It is preparing to use credit derivatives now because of increasing liquidity. He added Volvo has a sophisticated treasury department and makes extensive use of derivatives, such as interest-rate swaps and options.
Scott Eaton, managing director at Deutsche Bank in London, said Volvo would be among a handful of corporates to use credit derivatives. But he expects more corporates to follow as they see the practical use for the instruments. He added credit default swaps have primarily been an inter-bank product, which is why many corporate treasurers do not understand the product and have opted to stay away.
