Primus Guaranty (PRS) announced yesterday that it entered into a significant credit mitigation deal with one of its counterparties, reworking $1.2 billion in notional value of credit default swaps. According to the press release, $40 million in notional exposure written on a monoline insurer was terminated for $15 million, or 37.5 cents on the dollar. The other billion-plus is being moved to a subsidiary of Primus Financial capitalized with $36 million, which is the maximum exposure (plus future premiums on those swaps) that can be lost.

Working backwards, ring-fencing certain swaps clips the tail risk existing in the portfolio at about 3.1% – a fairly high level that’s about 50% above what I’ve modeled previously. From the press release, my assumption is that the counterparty is willing to do this to minimize credit/counterparty risk related to Primus; it’s not collateral per se, but it functions in the same way.

As for the monoline settlement, well, it speaks volumes about what happens if you aren’t a systemic risk – privately negotiated solutions actually come about, and it means that companies that took risks take losses (or at least agree to accept more uncertainty/variability). One possibly safe extrapolation: if counterparties to a company that doesn’t warrant liquidity concerns like Primus are willing to take substantial haircuts on their CDS transactions, you better believe that Santa Claus came down the chimney for everyone with claims against AIG that were repaid in full. It’s simply a perverse trait of the financial system, and our government, that smaller players are left to deal amongst themselves, whereas larger players are assisted and handed a different set of rules to play by.

More to come after earnings next week…

Lastly, a non-related note. I’ve learned a lot from David Merkel, and he asked those who read them to link to this about the SEC. It’s the least I can do, and I encourage you to read it.

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Disclosure: I own both Primus stock (PRS) and debt (PRD).