Kicking off what analysts are calling a small trend, New York-based Primus Financial Products recently became the first company structured solely to be a swap counterparty, selling protection via credit default swaps.

"We're not a dealer, we're not a CDO, and we're not an insurance company," said Chief Executive Officer Tom Jasper. "What we are is a credit derivatives company."

As derivatives are becoming a more and more widely accepted method of transferring risk, it is not surprising that at least two additional companies - both at different stages of development - are following suit. The two are said to be familiar names in the asset-backed market, and the first will likely launch in mid-summer, according to Moody's Investors Service, which, along with Standard & Poor's, has awarded Primus a triple-A counterparty rating.

Primus will begin trading in the next few weeks, Jasper said. In the first year of trading, Primus is planning to build a portfolio of about $5.5 billion in single name investment-grade corporate and sovereign credits.

"The plan is to take advantage of what we believe is a pretty efficient capital model and cost model, and to become a very efficient investor in investment-grade risk, using, as the transfer vehicle, the credit default swap," Jasper said. "So we're transferring risk synthetically versus a cash instrument."

Though many of its clients, which could include CDOs, insurance company portfolio managers, hedge funds, banks and other cash investors, might be using PFP to establish hedges, Primus is not incorporating a hedging strategy for its own portfolio, and, only in special situations, will buy credit protection for its exposures. Its triple-A counterparty rating is based primarily on its capital levels, or other resources, being sized to match the expected loss (Moody's) of its referenced obligations.

Also, contrary to some players' initial impressions of the company, Primus doesn't plan to launch any CDOs from its portfolio.

"It's not contemplated that we would securitize the risk that we will take on," Jasper said. "We're very happy to hold the risk to maturity."

Highly managed vehicle

Though Primus is staffed with top brass ex-Wall Streeters - Jasper is a 20-year veteran, most recently at Salomon Smith Barney - the company's structure relies not just on cutting-edge financial technology, but advanced hardware and software systems as well.

"It's very impressive," commented William May, a managing director at Moody's, adding that the company probably wouldn't be able to serve its function without the physical technology. "They had to put a lot of money and effort into their computer systems. I think they're pretty much cutting edge."

As mentioned, PFP will only write protection against investment grade credits, as part of its agreement with the rating agencies. Also, according to Moody's, there are very lengthy rules, or operational procedures, which Primus must adhere to - the execution of which makes use of its systems.

"Each time they make a trade or a swap, they have to make sure they will still meet their expected loss target [which they have sized against]," said Cesar Crousillat, a senior analyst at Moody's. "This means that they are limited to trades in which they cannot violate the expected loss target."

At the same time, counterparties can select protection from a list of as many as 1,200 credits, for between $1 million and $40 million, via the firm's Web site. The trades can be conducted over the company's secure electronic platform.

Moody's has already fielded a few calls from potential counterparties.

Through its parent/holding company, Bermuda-based Primus Guaranty, PFP has the backing of some pretty solid names, its lead investor being XL Capital, which seems to be implementing a strategy of equity relationships with derivative-savvy asset management shops, such as Stanfield Capital Partners.

Other investors in Primus include the Radian Group, CalPERs/PCG Corporate Partners and Aegon USA. All told, Primus raised $155 million in capital ($72.75 million from XL), plus a $115 million reinsurance policy from Radian Reinsurance.

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