Primus explores new CDPC model

Primus Guaranty, the Bermuda-based credit derivatives product company (CDPC) and asset manager, is looking into the possibility of setting up a new entity to sell credit protection, but unlike its existing business model, the new venture would post collateral.

CDPCs sell protection on single-name credit default swaps (CDSs) and senior tranches of collateralised debt obligations. As they are not required to post collateral, CDPCs relied on AAA ratings to entice banks and other parties to conduct business with them. But in a market where counterparty credit risk is a particular concern, the inability to post collateral hit several CDPCs as the financial crisis escalated in 2008.

This culminated in the downgrade last October of Primus' credit protection selling arm, Primus Financial Products, by Moody's Investors Service (from Aaa to Aa1) and Standard & Poor's (AAA to AA+). In the same month, Fitch Ratings withdrew its ratings on five other CDPCs: Aladdin Financial Products, Athilon Capital Corporation, Cournot Financial Products, Invicta Capital and Quadrant Structured Products.

Since being downgraded, Primus' credit protection arm has been in wind-down mode. But during a conference call on May 6 to discuss its first quarter performance, Primus' chief executive Tom Jasper announced the firm is examining the possibility of launching a new, separate company that would sell credit protection on single-name corporate and sovereign reference entities. Unlike Primus Financial Products, however, this new venture would post collateral.

"Over the last few months we have built and are managing a $1 billion test portfolio that will help us prepare for the prospective launch of this new credit protection seller. So far, we've seen good performance, although we continue to refine and enhance our approach to managing this new test portfolio," Jasper remarked.

If the venture gets up and running, it could represent a ray of hope for CDPCs, whose forced exit from the credit derivatives market has left a void yet to be filled.

Primus posted a net income of $106.8 million in the first quarter of 2009, compared to a net loss of $670.1 million in the corresponding period last year. Primus Financial Products is currently amortising its credit default swap portfolio, and is not expected to enter into new business. "Primus Financial Products will not pursue new opportunities to sell credit protection. Instead, its existing credit swap contracts will expire at maturity unless they are terminated earlier either by a credit event or the mutual consent of both parties," stated Jasper.

According to Jasper, approximately $635 million notional of single-name CDSs matured in the first quarter of 2009, and a further $2 billion is set to mature before the end of 2009.

As well as the new credit protection venture, Primus will look to expand operations via its asset management arm, Primus Asset Management, which currently manages $23 billion in structured credit assets.

"During the first quarter, we entered into negotiations with one such firm that would significantly increase the number of funds and amounts of assets we manage. We have signed a letter of intent with this asset manager, which specialises in the leveraged loan market, and we expect to close on this transaction shortly," Jasper commented.

The company has also signed up to participate in the Term Asset-Backed Loan Facility - a Federal Reserve Bank of New York program offering investors relatively inexpensive loans to purchase triple-A rated asset-backed securities.

See also: Primus takes hit in Q4
Primus downgrade prompts questions over CDPCs