Energy firms turn to credit derivatives market

More energy companies are likely to start purchasing credit derivatives as a way of mitigating counterparty credit risk, analysts said at a conference in New York this week. This is partly because spreads on single-name credit default swaps (CDS) of investment-grade energy companies are starting to stabilise, Vincent Abruzzini, senior credit portfolio manager with Primus Financial, told delegates at the Standard & Poor’s energy and utilities event. Primus is a New York-based wholesale provider of credit risk protection.

CDS prices have started to steady, mainly because of attempts by energy companies to refinance in the past few months, Abruzzini added. Analysts expect fewer defaults in the sector in the coming months, said John Anderson, New York-based director of the bond and corporate finance group of John Hancock Life Insurance. Even so, energy companies would still do well to consider utilising the credit derivatives market as a means of mitigating against trading counterparties going out of business, analysts added.

American Electric Power this month told RiskNews' sister publication, EPRM, that it has started to use credit derivatives to hedge the risk that trading counterparties could teeter on the brink of bankruptcy. The Ohio-based power company is rumoured to have entered into a $30 million to $40 million CDS to cut its exposure to one energy counterparty in particular and is also said to be considering entering into a total return swap. AEP officials declined to elaborate on the matter.