Primus Guaranty and the Viability of the CDPC Model

Most people who have followed my writing during the summer have seen my coverage of Primus Guaranty, a credit derivative products company [CDPC] that sells credit protection via credit default swaps [CDS]. On July 22nd, I placed my entire portfolio into Primus, via a combination of its common stock (PRS) and senior debt (PRD). I saw (and see) Primus as a company with very clear risk exposures thanks to the finite and short-lived duration of its swap portfolio, and the fact that a stress-tested loss estimate nets an equity value in the mid-single digits (i.e. about $5/share), which holds even if the company were to enter a run-off.

I've tried to clear a number of misconceptions about Primus, the most important being that the company does not face the liquidity risk that took down Bear Stearns, et al. This is not an accident of chance, but due to the capital structure of Primus – because their AAA/Aaa-rated subsidiary that sells CDS protection is a CDPC, they do not post collateral regardless of how bad the mark-to-market losses on their portfolio become. Even a ratings downgrade could not result in counterparties demanding collateral; it simply isn't how Primus does business.