Today, Primus Guaranty released its earnings – I still own both the holding company’s debt (PRD) and the stock (PRS).
As background, Primus Guaranty is a holding company with a subsidiary (Primus Financial Products, or PFP) that was formerly an AAA/Aaa-rated counterparty selling credit default swaps (CDS). To increase acronym density, PFP is a Credit Derivative Products Company (CDPC), and as such does not need to post collateral should a CDS contract move against them. This, along with the long-dated maturities of the company’s debt (first maturity in 2021), means that liquidity risk is minimal.
In the last several months, PFP has been downgraded by the ratings agencies – a formal nail in the coffin, as PFP had written little new business in 2008 – and suffered a handful of credit events due to CDS reference entities defaulting. Last quarter, management of the existing swap portfolio switched to amortization or run-off mode, with the goal being to preserve as much of the existing value of PFP as possible in order to dividend up to the holding company in the future.
What value lies in Primus Guaranty, and how will that value be delivered? Key to this discussion is an understanding of the corporate structure; PFP holds the majority of cash, but also unknown liabilities from potential CDS losses. There is currently $687 million in cash held by PFP, against notional CDS outstanding of $22.5 billion (leverage of 32.75x). Two implications: should CDS losses be in excess of that amount, they are not recourse to the holding company, and there is $76.8 million in cash outside of PFP – i.e., at the holding company – currently available to bondholders. Adjusting for completed bond repurchases, that leaves approximately $17.50/note, relative to a $25 par value and a current market price of $10.30. Based off the market price, the notes yield 17% right now.
In October 2008, Primus announced it would be repurchasing its debt; later the repurchase authorization was extended to its common stock as well. My calculations of trading volume in the debt since the announcement relative to the amount Primus repurchased at the end of December implies that the company is behind 33% of trading volume in the debt. The average price paid for repurchases of $8.28 is just over 33 cents per dollar of face value.
In November 2008, Primus raised its repurchase authorization and extended the policy to include the stock.
