Williams is planning to set up a credit derivatives trading operation within about the next six months. The energy and communications company is looking at managing its internal credit risk and offering liquidity to corporates, according to Jones Murphy, director, hybrid derivatives in Tulsa, Okla. It will trade plain vanilla credit default swaps and structured credit products, with the bulk of its activity being in proprietary credit structures, which Murphy declined to describe.
The move makes sense now because credit is an increasing concern to players in the market as the credit environment generally is deteriorating in the U.S., spurring interest in many corporates in hedging credit exposure, said Murphy. According to a report issued by Moody's Investors Service last week, the ratio of upgrades to downgrades on investment grade corporate bonds last quarter fell to its lowest level since 1990.
Williams has traded credit derivatives before, but Murphy said, "we're at a relatively low level of activity right now." It is looking to hire one or two traders within the next six months to handle the increased activity. Williams currently has no traders who solely trade credit derivatives.
Credit derivatives traders applauded the entrance of a major corporate to the market, noting it can only help liquidity. Williams appears to be following the model of Enron Credit, which manages credit risk from Enron's commodity trading operations and targets corporate customers, they said.
Compared to banks and financial institutions, corporates have generally been slow to embrace credit derivatives, noted credit derivatives traders. But corporates represent a potentially vast audience for the product, because many have extensive exposure to manage. "Any company that has receivables has credit exposure," said one trader at a U.S. bank. Companies that offer supplier finance, such as telecom companies, could manage credit risk more efficiently via credit derivatives, others added.
Williams is rated Baa2/BBB-. While these ratings could be a hindrance in being active in offering credit protection to corporates, the company is planning to set up a subsidiary with a higher rating once it becomes more active in serving corporate customers. That should be in about one or two years, said Murphy.