U.K. transport group Arriva has decided to stop entering cross-currency swaps. Brian Hall, treasurer at Arriva in Sunderland, said the company will cease entering the deals because they do not qualify for hedge accounting under International Accounting Standard 39 and so have to be marked to market. That creates an increase in balance-sheet volatility, he added.
Arriva currently hedges foreign exchange and interest rate risk simultaneously by wrapping them into cross-currency swaps. The group uses the swaps to convert euro-denominated assets from European subsidiaries into fixed-rate sterling to match sterling liabilities. Arriva is being forced to split the interest rate and FX trades in order to put the interest rate transactions on balance sheet and meet the standards, Hall explained. IAS39 is restricting the range of instruments corporates are willing to use because many do not qualify for hedge accounting. Hall said Arriva is looking into which instruments--instead of cross-currency swaps--will receive a favorable accounting treatment under IAS39. "There is a lot of head scratching going on," he noted.
Hall did not comment on the maturity of the current cross-currency trades, but said the entire portfolio will unwind over the next three years. He declined to name derivative houses Arriva enters deals with, but said the company has long-term relationships with roughly 10 banks in London.