PFS Financing Corp., an active issuer of asset-backed securities backed by insurance premium finance loans, is preparing a $300 million issuance.
In PFS Financing Corp. 2021-B, the revolving pool of loans will be secured by investors’ rights to receive amounts from insurance companies should borrowers fail to repay the latter the outstanding amounts on unearned premium finance loans.
On fully prepaid insurance policies, unearned premiums are sums that correspond to the time left on an insurance policy, which insurance companies can use as capital to make loans to borrowers.
Borrowers in the 2021-B pool are mostly small- and medium-sized businesses that are borrowing against property and casualty policies, according to Moody’s. The agency has identified a historically low charge-off rate on these loans as a credit strength. Borrowers have a high incentive to repay the loans to their respective insurers. If a borrower defaults on the loan, the servicer will cancel the insurance policy, and PFS Financing Corp., 2021-B, will receive a refund of the unearned premiums from the insurance company that issued the policy.
Also, the pool of borrowers is very diverse and granular, with each borrower accounting for 0.4 percent of the pool’s total principal balance. The top eight insurance companies that have contributed loans to the securitized pool represent 22.4 percent of the total principal.
Moody’s also points to the scale of ABS experience of IPFS, the deal’s sponsor. Formed in 1977, it is one of the largest insurance premium finance companies in the United States. The company also is also the servicer on the deal.
Yet the transaction has vulnerabilities, from a credit perspective. Despite its size and experience, IPFS has a monoline business model, Moody’s said. If IPFS defaults, and the time period between an obligor’s default and policy cancellation wears on, the situation could result in losses for the noteholders. Also, about half of the loans in the pool are concentrated in four states. This could present an issue for collections from those small- and medium-sized businesses in the event of local economic distress.
Moody’s assigned a rating of ‘Aaa’ to the $282 million class A notes, while the class B notes, amounting to $18 million, were unrated.
