In its sixth securitization of 2020, IPFS Corp. is pursuing a $400 million deal backed by a revolving pool of insurance-premium finance loans and secured by the right to receive the unearned premium amounts from the loans.
A key strength of the PFS Financing Corp. 2020-F securitization, according to a Moody’s Investors Service pre-sale report published July 30, is that property and casualty insurance policies are essential to the borrowers, mostly small and medium-size businesses, incenting them to make their loan payments. In addition, a borrower defaulting will prompt the servicer to cancel the insurance policy, and the issuer will receive a refund of the unearned premiums from the insurance company issuing the policy.
However, PFS originates and also services the loans. That creates risk should it default, resulting in losses for the securitization’s note holders and extending the time between the default of an obligor and when IPFS cancels the relevant insurance policy to collect the unearned premiums. Moody’s adds that a default could also delay the return of the unearned premiums by the insurance carrier to the issuer.
However, the rating agency notes, the issuer has a “warm” back-up servicing agreement with Wells Fargo Bank under which the bank “would assume substantially all of the servicer’s duties under the servicing agreement upon termination of IPFS as servicer.”
Other deal strengths, Moody’s says, include a granular and diversified pool of borrowers, with each making up less than 0.7% of the loan pool principal balance, noteholder protections against averse changes in pool characteristics, and IPFS’s more than 30 years of experience in the business.
The Moody’s report also lists additional potential credit challenges, including half the loan pool concentrated in four states, although the remainder is spread through the rest of the states as well as provinces in Canada. The 5% of denominated in Canadian dollars represents potential foreign-exchange risk, since that exposure will be unhedged.
Another securitization in June by the same issuer saw the AAA/Aaa portion price for a coupon of 1.21%, and the single-A piece at 1.71%. That deal was denominated entirely in USD.
