Primus Grows with CypressTree

Primus gains scale through CypressTree acquisition

Primus Asset Management, Inc. (PAM), a wholly owned subsidiary of Primus Guaranty, Ltd. (PRS - Analyst Report), announced the closure of the acquisition of CypressTree Investment Management, LLP on July 9, 2009. We view this acquisition as positive for PRS as it will gain more scale with a leveraged platform.

With approximately $2.4 billion of assets under management, CypressTree will operate as a wholly-owned subsidiary of PAM. The nature of CypressTree’s business is managing leveraged loans and high yield bonds among various other investment products, including collateralized loan obligations (CLOs), collateralized swap obligations (CSOs), off-shore funds and separately managed accounts. Following the acquisition, PAM now has over $25 billion in assets under management in structured credit vehicles.

Focusing on the single niche area of credit swaps, Primus is able to maintain lean operations and leverage its employee base while growing its business. As the company grows its portfolio with such acquisitions, the ratio of the notional amount of its credit swap portfolio to the number of its employees will decline, which could offset some of the current margin pressures.

In view of the challenging market conditions, PRS has decided to manage its business in the amortization mode versus the growth mode earlier and has also taken several other initiatives to reduce the risk of its portfolio and conserve its capital. However, the company expects to perform better than its peers -- Ambac Financial (ABK - Analyst Report) and MBIA (MBI - Analyst Report) -- in the upcoming quarters due to current CDS spread tightening.  We are thus maintaining our Hold recommendation.