Primus Guaranty, Ltd. Q1 2008 Earnings Call Transcript

| About: Primus Guaranty, (PRSG)

Primus Guaranty, Ltd. (PRS) Q1 2008 Earnings Call Transcript May 6, 2008 11:00 AM ET


Richard Claiden – CFO

Tom Jasper – CEO


Craig Siegenthaler – Credit Suisse

Darrin Peller – Lehman Brothers


Good day, ladies and gentlemen, and welcome to the first quarter 2008 Primus Guaranty, Ltd. earnings conference call. My name is Karen and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Richard Claiden, Chief Financial Officer, please proceed, sir.

Richard Claiden

Thank you, Karen. Good morning, ladies and gentlemen, and welcome to our quarterly earnings call. I'm Richard Claiden, Chief Financial Officer for Primus Guaranty, and with me is Tom Jasper, Chief Executive Officer; Chris Gerosa, our Corporate Treasurer, and Nicole Fatica, our Investor Relations Officer. I'll begin the call discussing the company's overall financial results for the quarter and the current portfolio size, later focusing on our financial results for the quarter in greater detail. Tom will give his perspective on the first quarter, market and business development since February.

Some of the statements included in our discussion, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters are forward-looking statements that involve a number of risks and uncertainties. For those statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. For a discussion of the factors that could affect our actual results, please refer to the risk factors identified in our 10-K. We expect to take about 45 minutes to complete our prepared sections and then we'll open up for questions.

In discussing the results, I will refer to both the earnings release and the supplementary information package, which were both published earlier today and contain a reconciliation from GAAP to economic results. I will discuss both economic results and GAAP results for the quarter.

Our economic results for the first quarter of 2008 were $22.1 million or $0.49 per diluted share, compared with $13.2 million or $0.30 per diluted share in the same quarter of 2007. This is an increase of 67% over the first quarter of 2007 and is predominantly due to higher premium revenues, asset management fees and lower credit mitigation costs. Net interest income fell slightly and our operating expenses were flat compared with the first quarter of last year.

Our GAAP results reflect the significant widening of credit spreads during the quarter, which resulted in a substantial increase in the unrealized mark-to-market loss in our credit portfolio of credit swaps sold, which resulted in a GAAP net loss in the first quarter of 2008 of $670 million, compared with a net GAAP loss of $9.7 million in the first quarter of 2007. As you may know, credit swaps spreads have contracted significantly since the end of the quarter. As of the end of April our negative mark-to-market on the portfolio improved by approximately 40%. I should note this is not necessarily an indication of where we will end the end of this quarter, and we all know, there is a lot of volatility in swap spreads currently. I would like to make four points relating to our GAAP results.

Firstly, our business strategy is to hold the swaps till maturity at which the mark-to-market value is zero, other than for credit mitigation or credit events. Secondly, we record our credit swaps at fair value because we are required to do so under GAAP rules even though this is not consistent with our long-term buy and hold business strategy. Third, we believe the changes in the GAAP capital and even the GAAP negative net worth will have no impact on our AAA ratings. Fourth, from a liquidity standpoint, we don't post collateral to our counterparties, so they have no claims on our capital based on the GAAP mark. There are no ratings figures, which would require us to pay post collateral even if we were downgraded below AAA.

Turning to our new business volume for the quarter, we put on $1.2 billion in new credits swaps. Virtually all of this business was transacted in the first half of the quarter, as we saw a slowdown in new business activity resulting from the current turmoil in the credit markets. Tom will discuss this in greater depth in a few minutes. The $1.2 billion in new volume will generate $41 million of total future premiums assuming we hold the contracts to maturity.

Additionally, the first quarter transaction volume will more or less offset the maturities in the portfolio for the whole of 2008. All of our new transaction volume in the quarter was on a single name, we are on single-name credit swaps with a weighted average premium of 71 basis points, a weighted average rating of A-/A3 and an average tenor of 5.1 years.

Our capital credit swap portfolio was $24.3 billion at March 31, 2008, nearly 50% higher than the $16.5 billion portfolio at March 31, 2007. As a result of the increased business activity, the level of unearned premiums in our portfolio was $399 million at March 31, 2008 compared with $235 million at March 31, 2007, an increase of some 69%.

Now, I will turn it over to Tom so he can give you some perspective on our performance and the current state of the credit markets.

Tom Jasper

Thanks Richard. Welcome, everyone. I think you can see from our earnings release and Richard's remarks that our economic results for the quarter were quite strong. We saw economic EPS up 67%, economic ROE in the quarter of 21%. Unearned premiums increased 69% since last year. I would also like to highlight a key development during the quarter regarding the rating agencies.

First, Standard & Poor's reaffirmed Primus Financial's AAA counterparty rating. As S&P noted in their report, 'Primus Financial's portfolio is passing all rating-related tests, including its capital adequacy test. Primus Financial's portfolio also shows passing results in additional stress scenarios.'

During the quarter Moody's also issued a report on the credit derivative product company or CDPC industry. The report noted that CDPCs emerged as a significant new asset class in 2007, and said that the ratings for credit derivative product companies remains stable. As you know, Primus Financial was the first CDPC. Moody's also reported that there are currently about 10 to 15 CDPCs in various stages of development and that it expects to issue ratings on five of them over the course of 2008.

In my view, this reflects the continued attractiveness and viability of the CDPC business model. It is also worth noting that nowhere in the S&P report or in the Moody's report is there any indication that the rating agencies plan substantial changes to their CDPC capital models. While we are obviously pleased with these developments, the overall market environment in which we operate was very challenging in the quarter and for the most part it remains challenging. Let me spend a few minutes on this and then I'll come back to the important issue of counterparty capacity that we are currently facing.

At year end, the CDX index IG 9 was in the high 70s. That’s at the year end 2007. During the first quarter, it was as wide as 199 and it ended the quarter at 149. Today it’s about 90, which is a change of 40% since the end of the quarter. As you can see, the dramatic swings in the first quarter of 2008 was significant and reflected a repricing of credit risk and the absolute lack of liquidity in the market. What began as an issue associated with U.S. subprime mortgages spread during the quarter to a global credit and liquidity crunch across all asset classes, including investment-grade corporates, which as you know is our principal focus.

During the quarter we saw moves by the Federal Reserve which were unprecedented, at least over the 30 years that I had been working in the financial markets. We also saw global central banks adding liquidity to their financial systems following the lead of the fed. Additionally, there was a strong push by central bankers to encourage banks to lend to each other and their customers to avert a shutdown in the credit markets, which could lead to an even deeper slowdown in the G-7 economies. It was a very bad situation.

Certainly from our prospective, the central bank's willingness to liquidity to the system and for the Federal Reserve to offer liquidity to investment banks in addition to commercial banks was the right decision. It was very positive news for us as an investor in the sector. As was clearly indicated in the case of Bear Stearns, a lack of liquidity was the key to their downfall. Additionally, the ability of various institutions to raise capital was also positive news as it improved their balance sheets, but it also showed that there were large pools of capital looking to make attractive investments. We are now about 45 days from what seemed to be the darkest point in the cycle and I'm sure everyone is asking the question, whether we have seen the bottom. Many market participants have offered their views on this question and from Primus' perspective, we are starting to see some positive signs which I will comment on in a few minutes.

Let me now return to Primus and the status of our counterparty capacity. As we said, January was a good this month in terms of new business volume and premium levels. Beginning in February, however, we saw a sharp reduction in the number of counterparties we were able to transact with. During the course of March and through April, new credit swap business flow for the most part came to a halt. I think the reasons behind the slowdown in our activity levels are clear. I have already touched on the macro factors affecting the market.

With regard to Primus, our counterparties are all large financial institutions, and during the first quarter they were experiencing significant challenges around liquidity. In particular, there was a sharp reduction in risk appetite combined with intense pressure on capital adequacy ratios. For many institutions, the balance sheet and capital implications of writing down portfolios is subprime mortgages, among other asset problems was their singular concern. In such circumstances, increasing credit lines to their counterparties, including Primus was not a priority.

The Bear Stearns situation also led firms to reevaluate their counterparty risk profile, particularly to those counterparties that do not provide collateral such as Primus. In addition, for several quarters now the problems involving the monolines have dominated the headlines, and certainly this has had a dampening effect on our business activity, as our counterparties are heavily exposed to that industry.

Primus tends to get lumped in with the monolines by our counterparties in a sense seeing their counterparty risk, even though our counterparties appreciate we have a different business model and portfolio composition. The first quarter was a period when our counterparties were not making fine distinctions across business models. So, from our perspective, these were some of the key factors impacting counterparty capacity. I appreciate, however, that shareholders’ want to know more than just the cause of the slowdown in new business. They also want to know when conditions will improve so we can begin to generate new business volume.

I have been in the financial markets long enough to learn that predicting the timing of events is an art best left to others. However, I do think it's fair to say that over the course of the next few months, we will begin to see trends develop that should result in increased counterparty capacity and generally more favorable business conditions for us across our structured credit platform.

One of these signals is that banks begin to focus on managing their balance sheets instead of their capital ratios. By this I mean the financial institutions today seem to be singularly focused on improving their capital ratios, either by raising new capital or reducing their leverage or a combination of both. For example, according to one report, 16 firms have raised more than $150 billion in new capital in the last two quarters. I think that once these institutions determine that they have appropriate capital levels, they will return to managing and allocating their capital most productively.

The credit swap market and Primus more specifically continues to offer these institutions a sound risk transfer alternative. As we have discussed before, Primus' AAA ratings provide an attractive risk weighting to banks that are managing their regulatory capital under Basel II. Another positive signal that would indicate a more favorable environment is a resolution of the monoline issue, one that takes it off the front pages of the financial press.

A third positive signal would be the return of the structured credit investor to the financial markets. It’s not unreasonable or surprising that during a period of significant volatility in the value of credit assets such as we have seen for the past three quarters, structured credit investors have remained on the sidelines. However, at some point, we would expect these investors to become more comfortable with their ability to analyze and value credit risk and returns.

I want to add, that we are seeing indications that these investors are beginning to come back to the credit markets as I'll discuss in a few minutes. So, that’s my view on what we will need in order for counterparty capacity to improve, and our new business activity levels to improve. Where are we in the process? Again, I'm not a market timer, but as I suggested, I do see some signs of light at the end of the tunnel.

As we continue to work through the challenges of today's market environment, it's important to note a few important points. First, I think the issues we are dealing with have less to do with our company or our business model than it does with a more general apprehension in the credit markets. I believe the CDPC business model and the Primus Financial business model are in fact quite sound. We saw a validation of the CDPC model during 2007 as seven new CDPCs backed by generally large financial sponsors initiated business activities.

By the end of this year, 2008, we concur with Moody's assessment that there will be three to five new CDPCs. Second, it’s important to remember the value currently embedded in our company. Our level of unearned premiums totaled nearly $400 million. That’s an increase of 69% year over year. This increase reflects the rapid growth of our credit swap portfolio and attractive risk adjusted premium levels over the past four quarters.

Just to reiterate, this $400 million in unearned premiums reflects cash payments that will be made to us under our existing CDS contracts if they are held to maturity. In addition, the level of runoff business over the next three quarters is relatively small, about $735 million. So, with the new business in the first quarter, we've already offset what we'll roll off over the course of 2008. With all of this said, we are very focused on our counterparty relationships and the reopening of these lines.

We continue to meet regularly with our counterparties in order to keep our relationships strong. As you know, a member of our senior management team based in London is specifically assigned to our counterparty relationships. This individual is supported by myself and the rest of our executive team. All of us at Primus are involved in this effort.

Let me shift gears now and discuss another important subject, credit mitigation. During the first quarter, we took a relatively small credit mitigation charge, at a level certainly below what the analysts expected. I want to underscore, despite the positive variance in the first quarter, two things about credit mitigation expense. First, it tends to be lumpy from period to period, which means it does not model consistently over the short term, like a quarter, but should do so over the longer-term. And second, we continue to believe that our estimate over the long term that credit mitigation expense will be in the range of 5 to 7 basis points per annum is appropriate.

I also want to comment briefly on how we have continued to enhance our portfolio and risk management platform in anticipation of a more risky environment. To begin with, throughout most of 2007, you heard me talk about how we were focused on improving overall portfolio quality. By year end, portfolio quality was a sound, strong single A. During 2007, we've also moved up the attachment points of our tranches, focusing on high AAA levels.

There are, as you know, challenges in managing our high-quality corporate portfolio in a more risky environment and during a broad repricing of credit risk. We've seen some negative migration and there have been some fallen angels whose ratings have moved from investment-grade to sub investment-grade. Overall, though, the single-name portfolio continues to perform well in terms of credit migration. Given the current economic environment, we have redoubled our efforts to analyze which reference entities will be at the highest risk for credit problems if a recession were to occur.

As part of our analysis, we also look at the potential timing and causes of credit problems, availability of liquidity and capital is paramount in this exercise. Based on our analysis, we will take actions where we see fit to manage the overall risk in the portfolio. In so doing, we will continue to weigh the economic costs versus the capital benefits of any potential credit mitigation action.

This is something we are constantly evaluating. For example, when a reference entity moves investment-grade to non investment-grade and assuming the risk of insolvency is low, how does the expense we would incur in mitigating that exposure compared to the initial capital that we need to allocate to this position? I want to mention one additional point regarding our financial results and our credit protection portfolio.

Obviously, the widening of spreads that Richard discussed created a large GAAP loss for us this quarter due to the unrealized losses in our credit swap portfolio. We acknowledge on its face the GAAP number seems, and for that matter, is large. However, you know and Richard reiterated how we view our GAAP results and why we developed the concept of economic results. I also want to share with you the views of others on the subject.

In his most recent annual report, Warren Buffett had this to say about the GAAP mark-to-market exposure of his company's derivative positions. 'Changes at the value of a derivative contract, however, must be applied each quarter to earnings. Thus our derivatives positions will sometimes cause large swings in reported year earnings, even though we might believe the intrinsic value of these positions has changed little. We will not be bothered by these swings even though they could easily amount to $1 billion or more in a quarter, and we hope you won't be either. You will recall that in our catastrophic insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in long runs. That is our philosophy in derivatives as well.'

Now, obviously, Berkshire and Primus are different businesses and use derivatives in different ways. But I think we shared a bit in the belief that is important to look through the GAAP results and focus on the long term. I would like to move on now to discuss our asset management business.

The existing Primus transactions continued to perform well relative to their peers. We did not see any opportunities to add to our assets under management in either our collateralized loan or collateralized swap businesses in the quarter due primarily to the fact that the structured credit investors remained on the sidelines, as I noted above. Continuing to scale these businesses remains a high-priority for us and we are exploring various avenues to accomplish this, including potential acquisitions of other asset managers or asset management contracts.

In the meantime, we are working with the dealers on entering the markets with new transactions. As an aside, I believe the willingness of the dealers to begin to sell their existing inventory of loans is a positive development for the reopening of this market for us. Additionally, over the past couple of weeks we are seeing a strong rally in the pricing of loans, which is another indication that buyers are returning to this sector.

Let me make one or two final comments before turning the conference call back to Richard. Primus recently helped organize a meeting during the quarter of the burgeoning CDPC industry. 10 companies participated, including Primus, and I believe it was a productive meeting whose principal focus was on educating the market on the CDPC business model. Additionally, I participated in the international swap dealers association – International Swaps and Derivatives Association annual meeting during March, and coming out of this meeting, there was some press coverage on the potential for a credit swap clearinghouse.

As was widely quoted, I'm skeptical of the implementation of a credit swap clearinghouse. A few final words to sum up the quarter, we generated strong financial results as evidenced by EPS growth and ROE. But we also had a disappointing end of the quarter in terms of new business volume and counterparty capacity. Clearly it is frustrating for us in this environment to face counterparty constraints on new business activity. However, we continue to think there are attractive opportunities ahead. As you know, we have a long-term orientation. I believe we have the capital infrastructure and talent required for success. As the market does open up, we will be ready. In the short term, the embedded value of the credit protection business will drive our performance.

Now, let me turn it back to Richard.

Richard Claiden

Thanks Tom. As I mentioned earlier, our economic results for the first quarter of 2008 were $22.1 million, compared with $13.2 million for the first quarter of 2007. Economic book value per share was $9.58 at March 31, 2008. Our economic return on equity for the first quarter of 2008 was 21%. Economic results, economic book value and economic return on equity were all the highest in our history. Primus Financial's first quarter premium income were $27.3 million was an increase of approximately $8.9 million or 48% compared with the $18.4 million in the first quarter of 2007.

The increase reflects the continued growth for the credit swap portfolio, which increased some 47% to $16.5 billion at March 31, 2007 to $24.3 billion at March 31, 2008. Included in economic results are amortized realized gains from the early termination of swaps, which we amortized the original life of the terminated swap. In the first quarter of 2008, the amortization of realized gains from the termination of swaps was $733,000, compared with $1.8 million of amortized termination gains in the first quarter of 2007.

Net interest income after the deduction of distributions on our preferred securities was $2.5 million in the first quarter of 2008, compared with $3.2 million in the first quarter of 2007. Interest revenue was $9.2 million in the first quarter of 2008 compared with $10 million in same quarter of 2007. This small drop in interest revenues is reflective of lower interest rates during the quarter, the impact of which was partially offset by increased cash balances in 2008.

The average balance on our investment portfolio was approximately $860 million in the first quarter of 2008, compared with $806 million in the first quarter of 2007. Total financing expenses in the first quarter of 2008 were $6.7 million, compared with $6.8 million in the year earlier quarter. The increase was principally due to higher interest rates in our auction paper. And as you probably already know, Primus Financial has issued $300 million in debt and preferred in the auction rate market.

These are long-term securities but the interest rates reset on a monthly basis. To the extent that the auction does not clear, these debt securities will reset to their maximum rates. On our $75 million of AAA rated debt, the maximum rate is 150 basis points over LIBOR. On $125 million of AA rated debt, the maximum rate is 225 basis points over LIBOR, and that on $100 million of preferred, the maximum rate is 357 basis points over LIBOR.

There’s been an increased level in interest and speculation as to what will happen in this market going forward, but at this point in time we don't expect to see any changes in the market for our securities in the second quarter of 2008. It’s worth noting that all of the debt and preferred is either long term or perpetual capital with the first maturity due in 2021.

Primus Financial's rating agency capital model has always made the conservative assumption that the auction securities will be set at maximum rates. So, the fact that this has occurred has made no difference to the capital cushion in our model. I’ll give you an update on our CDS of ABS position. As you know, six of the ABS bonds with a notable value of $45 million that under credit swap portfolio were downgraded to a CCC or a CC rating in January of this year.

These downgrades resulted in a technical credit event under the terms of the credit swaps. We made a provision of $48.8 million for the expected cost of the credit event in our 2007 economic results. In February of this year after the credit event occurred, one $5 million bond was delivered to us by a counterparty. We paid the counterparty $5 million, took possession of the ABS bond and terminated the credit swap on that bond at that point in time. We continue to hold the bond, which is still paying its coupon payment.

The other five ABS credit swap positions which incurred a credit event continue to run as swaps. Until we receive a credit event notice and physical delivery of the underlying bonds, we are not obligated to making cash payment related to physical settlement. The counterparties are required to continue to make premium payments. For the remainder of the portfolio, the $35 million of credit swaps on our ABS which are not downgraded to CCC or below back in January, they continue as active swaps and no further credit events have occurred. However, we obviously continue to monitor the ABS swap portfolio very closely.

Asset management fees on the three collateralized swap obligations or CSOs, and the two CLOs we manage were $1.1 million for the first quarter of 2008, compared with $661,000 the year before. This increase is primarily due to the addition of a second CLO in July of 2007. For the first quarter of 2008 and for the first quarter of 2007, our operating expenses, excluding the financing costs, were $10 million. Expenses on a line-by-line basis were comparable with the prior year, with compensation in 2008 being slightly higher than 2007 and soft were depreciation expense falling slightly.

Turning to our capital position, Primus Guaranty has consolidated net cash capital of approximately $871 million at the end of the first quarter of 2008. Cash capital at Primus Financial was $773.9 million at March 31, 2008. With regard to capital raising, we continue to monitor the market. If we see an opportunity to raise capital at Primus Financial at attractive levels, we will do so. Finally, let me conclude by briefly summarizing a few key points about our market, our company and our performance.

Clearly the credit markets have experienced an increase in volatility and a reduction in liquidity during the first four months of 2008. I think all credit market participants have been impacted by these events. Primus itself has not been immune from these challenges. We're seeing it today in the shape of a lack of new counterparty capacity. We believe, however, that we are very well equipped to handle the challenges facing market participants today.

Our core business is soundly profitable and it generates an attractive return on equity. We have a solid talent base and an operating platform. In short, we have all the elements in place to not only survive but to prosper as the credit crunch eases. And while we cannot predict either the timing or the pace of a return to normalcy in the market, we are beginning to see an improvement in conditions generally. We've now finished our prepared remarks and we will open up the call to your questions. Thank you.

Question-and-Answer Session


(Operator instructions) And your first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.

Craig Siegenthaler – Credit Suisse

Thanks and good morning. Can you give me some feedback from the rating agencies, I'm just wondering what their reaction was at the first quarter mark, and if there is any risk that they essentially change the economic capital? Maybe not due to anything that Primus is doing or maybe say the marks that you guys have, but more so due to potential marks that some of your competitors or potential risks and defaults over there.

Tom Jasper

Good morning, Craig. Certainly we can't tell you what the rating agencies are thinking, but certainly in our conversations with them we have certainly talked about the issues around our GAAP number. And we certainly informed them as to what our first quarter results look like and there has been no comment. We think we feel very good about what both S&P and Moody's said during the first quarter in their reports regarding their views on mark-to-market and GAAP earnings as it relates to capital models, and it’s very consistent with what we discussed in the call today.

Craig Siegenthaler – Credit Suisse

Based on where a lot of these assets, especially the corporate spreads have gone thus far in the second quarter. It's looking like you are probably going to be very positive mark in the second quarter if everything ended today?

Richard Claiden

I think we are actually seeing a reduction in the negative mark-to-market. So in terms of the change in the mark I cannot speak to where the marks will be at the end of the second quarter, but we certainly seen so far in this quarter an improvement or a lessening in the negative mark. So, in terms of the change from quarter to quarter, we would expect to see if things continue as they are, a positive GAAP result in the second quarter.

Craig Siegenthaler – Credit Suisse

Got it, and just to check on the ABS business. I asked this question last quarter. When you exited this business, you wrote a lot of business two quarters ago. You exited due to some high losses. Do you see any opportunity there in some of the higher level tranches or some of the earlier vintages? When you look at the businesses, though, if there's money being made, it seems like that’s probably the area where there is probably high risk but high reward in some areas?

Tom Jasper

Craig, just to be clear, the last transaction we got involved in this business at the end of '06, and the last transaction we did was I believe it was in July of '07. So, we stopped writing any new ABS business at that time because I was very concerned, as were a number of us here regarding the fact that we could not really see the bottom. So, clearly we took the provisions in the last quarter that we discussed and we are certainly looking at the opportunities in that marketplace currently, and certainly the spreads are quite wide. The question is in fact have we reached the bottom? Do we know where the bottom is? And have the rating agencies really finished their efforts on – will the changes that they made towards the end of last year and have subsequently made, there have been additional downgrades in the first quarter, will that start to rationalize itself? And would that present us for an opportunity to go back to the market at that stage? We are certainly looking at that situation. But clearly with the counterparty constraints that we discussed, that’s probably not the highest priority at the moment.

Craig Siegenthaler – Credit Suisse

Got it. Great. Thanks a lot for taking my questions.


(Operator instructions) And your next question comes from the line of Darrin Peller with Lehman Brothers. Please proceed.

Darrin Peller – Lehman Brothers

Thanks. Just a quick question on the rating distribution. Tom, you may have discussed already so apologies if you did. But the pick up in the single B in the Moody's ratings and I guess in the S&P to pick and the new entry into the CCC area, maybe you could help us understand. The credit mitigation expense was extremely low this quarter, and I guess lower than we had expected. And I just wonder if some of that was because you hadn’t really unwound as much of those positions as normal. Should we expect anything similar next quarter and what is the risk associated with that increase?

Tom Jasper

Again Darrin, I think the issue certainly in the first quarter was that there was just a blanket widening in spreads throughout the market and had a very significant widening in spreads which we pointed out. Certainly as we look at credit mitigation expense, we have to take a look at the cost of the unwind versus the economic capital benefit that we would get or the capital benefit we would get for doing that. And certainly, the part and parcel of as we saw the credit migration, the negative credit migration portfolio during the quarter was to, as I said in my prepared remarks, we re-doubled our efforts to really look at the issues around liquidity and capital and when those issues were going to be paramount to the solvency of a particular reference entity that we might be focusing on, and let's – certainly that that was the case in the BB and B categories. In turn, it’s a question – clearly the cost was quite high and we acknowledge that. And in turn, as I said in my remarks, we fully expect to incur credit mitigation charges during the course of this year which will be in the range of that 5 to 7 basis points per annum that we talked about. So, there’s no question that the first quarter was low.

Darrin Peller – Lehman Brothers

Have you already taken some steps during the – since the end of the first quarter that would I guess put credit mitigation at the second quarter that are considerably higher or closer to that 5 to 7 basis point range?

Richard Claiden

We've taken a small charge in the second quarter so far. We have none as you could tell in the first quarter but we have taken a small charge in the second quarter. It’s not out of line with what Tom alluded to on a sort of 5 to 7 basis points per annum ratio.

Darrin Peller – Lehman Brothers

Okay. Otherwise to me it seems that with 71 basis points on the new business, clearly the business model, this is a great opportunity, great environment for you guys to take advantage of those spreads. And I was just curious how much, again, you may have mentioned something earlier, but where are we standing right now? It seems like – I know you’ve done some work since the end of the first quarter, added some more. And I guess maybe you can help us understand really what you expect for the rest of this quarter with regard to both new business and spreads?

Tom Jasper

Certainly we've seen – let's talk about the easy one first, which is the spreads. Certainly, we have seen a significant contraction in the spreads over the course of the last month, and essentially we are where we are today where we were at the end of last year, at the end of the year, in the high 80s, low 90s on the index. That being said, certainly in the fourth quarter of last year we were very active and we were very active in January of this year. So, we found this to be quite an attractive environment and certainly the business conditions today are still very attractive to us. The difficult component – part of your question is when can we expect new business to develop? Right now, we are seeing a small amount of capacity from a handful of counterparties. So it's – I'm talking about less than five. Now that is a significant departure of what we've seen in previous quarters for sure. As I said, we are very focused on turning around this situation. But part of our problem, of course, is this is not a Primus-specific issue, it is a market contagion issue that we are having to deal with. I think we are starting to some positive signs, certainly from our counterparties, and we are very frustrated. We are very anxious about our ability to get back into the market, it’ll be more active. And as I said, I continue to be very confident of the CDPC business model and Primus specifically in terms of what we offer to the marketplace as a risk transfer vehicle.

Darrin Peller – Lehman Brothers

Great. All right, thanks guys.

Tom Jasper



This concludes the question-and-answer session of your call. I would like to now turn the presentation back over to your host, Mr. Richard Claiden, for closing remarks.

Richard Claiden

Thank you, Karen, and thanks to all of the participants in the call. We look forward to speaking with you in a quarter's time. Thanks again. Bye-bye.


Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.

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