NEW YORK (Bloomberg) — Bermuda-based Primus Guaranty Ltd. agreed to buy CypressTree Investment Management LLP, which manages $2.4 billion of leveraged loans.

Primus, led by chief executive officer Thomas Jasper, will manage a total of $25 billion in structured securities and credit-default swaps after the acquisition, the firm said yesterday in a statement.

Primus, whose shares have fallen 77 percent since the start of the credit crisis in June 2007, is seeking to expand a unit that manages assets after being shut out of its main business selling contracts that protect against a borrower defaulting to banks and other financial institutions.

Primus joins firms including Blackstone Group LP and Fortress Investment Group LLC in looking to take over credit funds from managers after the value of their investments fell.

"We are going to see consolidation in the next two years," said Gene Phillips, a director at PF2 Securities Evaluations Inc., an advisory firm in New York.

Boston-based CypressTree and other firms that manage collateralised loan obligations generate lower management fees on underperforming funds. Without enough assets under management, remaining fees aren't sufficient to support the business, Phillips said.

"There are a lot of small CLO managers," he said. "They are most likely to be bought or amalgamated."

Jasper, 60, a derivatives pioneer who helped standardise swaps trading more than 20 years ago at Salomon Brothers, is rebuilding Primus after banks stopped buying credit swaps from it and similar firms last year amid the credit crisis.

Jasper created the company seven years ago to tap into the growing credit-swaps market by taking on the risk of corporate defaults from banks and other financial firms for fees.

Once given the highest ratings by Standard & Poor's and Moody's Investors Service, Primus's credit-swaps unit this year was cut to a level that prohibits it from selling new contracts after having to pay out almost $146 million, or 18 percent of its capital, following the bankruptcies of Lehman Brothers Holdings Inc. and Washington Mutual Inc. and the Icelandic government's seizure of its three-largest banks.

Credit-default swaps, which are used to hedge against losses or to speculate on a company's ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. Primus is now trying to preserve about $747 million in capital, not including future premiums on its remaining credit- default swaps, as it seeks new businesses, including acquisitions such as CypressTree.

Primus manages $800 million through two collateralised loan obligations, which pool high-yield, high-risk, or leveraged, loans and slices them into securities of varying risk.

Leveraged loans are rated below Baa3 by Moody's Investors Service and BBB- at Standard & Poor's.

CypressTree, which also manages CLOs, was founded in 1995, and taken over by Prospect Street Investment Co. in 1998, with the new owners keeping the CypressTree name, according to an S&P report on the firm in September 2006.