IPFS Corp. is preparing a $300 million securitization of loans used to finance insurance premiums, according to Moody’s Investors Service.
PFS Financing Corp., Series 2016-A will issue two tranches of floating-rate notes: a $282 million senior tranche that benefits from credit enhancement of 10% is provisionally rated ‘AAA’ by Moody’s; an $18.2 million subordinate tranche is unrated.
Wells Fargo Bank is the trustee and backup servicer.
The collateral pool consists of loans made to small- and medium-size businesses to fund a portion of their insurance premiums on newly issued insurance policies. The securitization also has an assigned claim on the unearned premium held by the insurer that writes the policy.
Among its rating consideration, Moody’s cited the fact that he property and casualty policies whose premiums are financed through the trust are essential to the operation of the small business obligors, which therefore have a high incentive to make their loan payments.
Also, if an obligor defaults, the servicer can cancel the policy and the securitization will receive payments of unearned premium from the insurance company that issued the policy.
As unearned premiums of one month typically depreciate by the time an originator cancels a policy, the value of the unearned premium returned to the finance company could be worth less than the outstanding loan amount during the early stages of the payment schedule. Because a loan typically amortizes more quickly than the insurance policy, unearned premium collateral decreases in value more slowly than the loan balance.
The servicer has procedures in place to cancel a policy within a month of delinquency. It charges off any portion of the loan that was not cancellable or that it could not recover one year following the first anniversary of a cancellation.
Credit enhancement for the class A includes the 5.75% subordination of the class B notes and at least 4.25% of over-collateralization.
Following the issuance of the 2016-A Notes and repayment of the 2013-A Notes, PFS will have five series of term notes outstanding, with an aggregate principal amount of around $1.7 billion, and five series of variable funding notes outstanding, with an aggregate maximum principal amount of $700 million.