Primus Guaranty, Ltd. - Primus to provide credit protection for dealers

The credit derivatives industry is to welcome a new participant in the next 45-60 days — Primus Financial Products. It is claimed that the venture is the first wholesale provider of credit risk protection on individual names. This means Primus is not a market-maker, but only a seller of protection on investment grade credits. “We will just buy and hold the risk, carrying it to maturity”, said chief financial officer Joe Bauman.

Bauman was head of derivatives sales and structuring at Bank of America until he joined Primus in July 2000; he is a former chairman of ISDA. The chief executive officer is Thomas Jasper, former managing director and global treasurer of SSB. He too was once chairman of ISDA.

Primus is backed by a total of USD 240m in capital, which has ensured it a triple A credit rating from S&P and Moody’s. The capital is comprised by a USD 155m investment of equity by its four principal backers and a USD 115m excess of loss insurance policy. The investors are XL Capital, Aegon USA, CalPERS/PCG and the Radian Group – three of which are insurance firms.

There are several incentives for market-makers to offset risk with Primus rather than dealing with a rival dealer, says Bauman. Firstly, it is clear that Primus will just take the risk and hold it. Thus it is not seeking to take economic advantage of its clients and will not, for example, move the spread to squeeze a counterparty. Moreover, clients will find that Primus will deal at the mid-market rather than the offered side.

Primus also seeks to deal in the less liquid names in which finding a market is not always easy. “We will find our niche beyond the 100 most active names”, says Bauman. Finally, it is a triple A name, unlike Wall Street broker/dealers and banks.

“Our characteristic will be in the breadth of names on which we offer protection rather than the depth. We will have clear limits on each name”, he explains.

Primus intends to limit its risk by diversification, but Bauman concedes that there will, of course, be defaults in which the firm will be obliged to deliver assets at par to the buyers of protection. “There will be defaults. We’re not setting ourselves up as perfect stock pickers”, he says.

This vehicle is a “unique way to tap into a fast growing area”, concludes Bauman. He hopes that Primus will have 25-35 clients in the first year, which will be found principally among dealers and portfolio managers. Currently, there are 9 employees but this will increase to around 20 when the company is up and running.

There were a few trades spotted in the default market today. Disney, which dealt at 73bp yesterday, went through at 75bp today. Sears traded at 80bp and 83bp. The firm announced yesterday that it will take a USD 208m expense in Q1 to write down the value of two acquisitions.

Goldman Sachs dealt at 46bp, which is around 5bp inside prices seen in mid-week. The general tone continues to be better offered in the light of the better tone in the stock market, agree dealers.