Bermuda-based Primus Guaranty Ltd., which manages $24.2 billion in credit-default swaps, had its Aaa counterparty rating stripped by Moody's Investors Service because of potential losses on contracts linked to failing financial firms.

Primus Financial Products LLC was cut one grade to Aa1, New York-based Moody's said in a statement. Moody's said it may cut the rating further.

Adjusting for hedges, Primus sold protection on $80 million of debt from Lehman, $16.13 million from WaMu and $215 million from Fannie and Freddie, Standard & Poor's said last week. S&P said it may cut its ratings on the company.

The loss of its top rating wouldn't require Primus to post collateral on its trades, and counterparties couldn't demand payments on those contracts, the Hamilton, Bermuda-based company said a statement last week. The company said it had $820 million in cash and liquid investments to meet claims on contracts.

Primus would have to pay out the difference between those sums and the recovery value of the debt protected, to be determined within a month, S&P said.

"Unprecedented credit market volatility and the resulting failure of such firms as Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual have clearly impacted Primus Financial," Thomas Jasper, chief executive officer of Primus Guaranty, yesterday. "However, at the end of September, Primus Financial had $820 million in long term debt and equity capital to meet commitments under its credit default swaps contracts. Additionally, $75 million of capital is held at Primus Guaranty."

In its report Moody's noted "the current strong liquidity position at the holding company".

The company added in its statement yesterday: "The downgrade of Primus Financial's Aaa rating does not trigger a credit event, or require collateral postings, or allow a counterparty to terminate its credit default swap transactions with Primus Financial.

"Primus Financial has agreed with Moody's to limit trading activities while it works on a plan addressing its current ratings profile."

Primus, which yesterday gained nearly 10 percent in New York trading to close on $2.78, has lost 78 percent of its market value in the past 12 months.