Primus Guaranty Ltd. (fka PRSG)

[Enterprising Investor]

Bank Stock Guru Makes 2012 Picks (12/01/11)

TheStreet:What are some of your non-bank investments?

Brown: Real special situations. A fun one for me is Primus Guaranty (PRS_). Primus was a credit derivatives product company (CDPC). They were the first one. All they did was write credit default swaps (CDS). They had a business model that said you didn't have to post collateral.

So we bought into the company--a small position--probably back in 2005, maybe 2006, on the theory that the CDS market was going to grow as fast as the interest rate derivatives market did, for the same reason: protection. By 2007, nobody was dealing with Primus as a counterparty. They didn't want to take the risk. This was a company that had huge leverage on a primarily investment grade CDS portfolio but we had a financial panic going on. So the downside risk was that the company would shut down and liquidate.

The stock went as low as maybe 40 cents a share. So we ended up buying a ton of stock at--let's call it under $3. So the first investment was terrible--one of our worst investments of all time--but the second investment has been one of our best, and combined you get an average performance.

Primus is in liquidation. We own 15% of the company today. Somebody else owns 30%. The stock's trading at $5.50 and we think we're going to get $10 in a couple of years. The CDS on a single name were typically five years in duration. So this company's entire portfolio is done by 2014. This is really just playing out the liquidation. The contracts are written. Every quarter they get the premiums, and every quarter an old segment of risk exposure runs off. So at the end of the day there's going to be some big payout. The company's in the market buying back stock. The company's buying back debt. But at the end of the day there's going to be a pot of gold

http://www.thestreet.com/story/11328249/2/bank-stock-guru-makes-2012-picks.html