ThyssenKrupp Looks At Credit Hedging After Downgrade

  • 03 Mar 2003
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ThyssenKrupp, a German industrial conglomerate with EUR38 billion (USD40.97 billion) in sales, is considering using credit derivatives to reduce its funding costs after a recent downgrade to junk status. "We are very interested in learning about [credit derivatives] in more detail and finding out what effect they can have on our funding costs," said Daniel Walk, a member of the finance strategy team in Dusseldorf. Standard & Poor's downgraded ThyssenKrupp two notches to BB plus on Feb. 21.

The company has approximately EUR5 billion in total debt, about EUR1.3 billion of which is in bonds and the remainder in loans. Walk said the company needs to refinance about EUR500 million in loans this year and would like to do so through the capital markets. He added the company would like to shift more of its debt from loans to bonds. ThyssenKrupp has spoken to credit derivatives houses about the instruments in general, according to Walk. "We're in [the] very early stages," he said.

The fact that ThyssenKrupp is looking at this shows credit derivatives are becoming a real tool for corporates, rather than just banks and insurance companies, according to Dominic O'Kane, head of European quantitative credit research group at Lehman Brothers in London.

Derivatives marketers and structurers said there are at least three ways ThyssenKrupp can reduce its funding costs by both buying and selling credit derivatives. The German conglomerate could issue a bond and simultaneously sell credit protection against its own bankruptcy. To make sure the protection buyer is paid if the corporate defaults ThyssenKrupp would have to back the default swap with a collateral agreement that would ringfence the payout in the event of its bankruptcy.

The corporate could also buy protection. By purchasing credit protection on itself before pricing a deal, if spreads widen it would be able to sell that protection at a profit to compensate for higher funding rates. An alternative would be to buy credit protection on a corporate name in the same sector, such as Corus, an Anglo-Dutch steel company, or even a basket of related credits. "Sometimes the corporate's real exposure is just to the level of funding across the entire corporate market, so it could even buy protection linked to an index of corporate names," noted one banker. Both of these methods would only help ThyssenKrupp's funding costs if the price of its credit-default swap increased or it received a further rating downgrade.

One banker noted, however, that institutions would need to be wary when selling credit protection to corporates. "You're taking a bet against a treasurer who knows more than you about his company," he added.

  • 03 Mar 2003

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