Primus restructures $1.2 billion of CDSs on monolines

New York-based credit derivatives product company (CDPC) Primus Financial Products has restructured $1.2 billion of credit derivatives protection the firm had written referencing a monoline insurer.

The credit default swaps (CDSs) were conducted with a “significant bank counterparty”, the company said in a statement on July 30.

Like CDPCs, monolines specialise in credit risk transfer – offloading credit exposures from financial companies. Since the onset of the credit crisis in mid-2007, many monolines have hit severe financial difficulty as a result of writing protection on toxic assets, such as collateralised debt obligations of asset-backed securities.

Avoiding any further mark-to-market losses on the trade, Primus said it had agreed to cancel CDSs totalling $40 million in notional, in return for a payment of $15 million. The remainder of swaps have been transferred to a newly formed subsidiary of the company, along with an assignment fee of $36 million for taking on the trades. The new entity’s exposure to the transactions would be limited to the $36 million payment, plus any future coupons, Primus said.

Tom Jasper, New York-based chief executive of parent company Primus Guaranty, said the move was consistent with the company’s stated goal of managing its credit protection portfolio as it amortised. The firm has suffered heavily from rating downgrades – the result of exposures to government-sponsored mortgage lenders Fannie Mae and Freddie Mac, Lehman Brothers, Washington Mutual and several Icelandic banks. It was downgraded from BBB+ to BBB– by Standard & Poor's in June, before the agency complied with a request to withdraw the firm’s rating. In February, the company also requested the withdrawal of its CDPC ratings from Moody’s Investors Service – developments that followed the loss of its AAA/Aaa ratings in October last year.

Other CDPCs, such as New York-based Athilon Capital, have also run into difficulty from rating downgrades. Meanwhile, concern about counterparty risk among banks – as well as losses on legacy trades with CDPCs and monolines – has severely impaired the ability of such vehicles to drum up new business.

Primus is amortising its credit protection portfolio, which totalled $21.5 billion in notional at the end of March, according to company filings. At that point, the portfolio had a weighted average maturity of 2.86 years, with at least $2 billion set to mature before the end of 2009. The company is now placing greater emphasis on its asset management business, and in July announced it had completed the acquisition of Boston-based CypressTree Investment Management, which specialises in leveraged loans and high-yield bonds.

It is also exploring the idea of selling credit protection on a collateralised basis and has had encouraging results from a $1 billion test portfolio it has been running since the first quarter of 2009. The transfer of a portion of the monoline-linked CDSs to a new vehicle was unrelated to the plan, a spokesman for the company said.

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