Credit DPCs are growing rapidly, says Fitch

Credit derivatives product companies (CDPCs), such as Primus Guaranty, are emerging as important participants in the burgeoning credit derivatives market, according to a new criteria report by Fitch Ratings.

The market for CDPCs is “growing rapidly” and displays characteristics similar to traditional derivatives product companies, structured investment vehicles (SIVs), managed synthetic collateralised debt obligations (CDOs) and CDO squared (CDO2) structures, according to Fitch. CDPCs are limited purpose operating companies that provide credit default protection on corporate obligors, asset-backed securities (ABS) and tranches of CDOs, and allow specialist credit managers to make leveraged bets on mostly highly rated exposures.

However, Alan Dunetz, a senior director at the credit ratings agency, said the unique appeal of CDPCs stems from their focus on credit default swaps (CDS) and their ability to operate independently of their sponsors, compared with traditional derivatives product companies that focus primarily on interest rate and currency swaps and options – (See: A new breed, Risk April 2006). “CDPCs have the ability to raise permanent equity capital and can sell credit protection on highly rated obligors to multiple counterparties on an ongoing basis,” said Dunetz. “We have seen a lot of interest in these companies over the past six to nine months and we have seen approximately a dozen proposals for CDPCs. We would expect to complete two or three ratings by the end of this year.”

Fitch has provided issuer default ratings and liability ratings for CDPCs, which are designed to manage credit risk by selling credit default protection. But CDPCs may also be susceptible to market risk, as well as interest rate, prepayment and foreign exchange risk, all of which are accounted for in Fitch's analysis. CDPCs are similar to managed synthetic CDOs in that they both sell protection on actively managed portfolios of reference obligations. But while managed synthetic CDOs have a fixed maturity date, CDPCs are set up to be permanent companies with broader operating flexibility and the ability to obtain funding from the public market.