IPFS Corporation is preparing to sponsor its second asset securitization deal for 2023 with a $400 million issuance from the PFS Financing master trust, a deal that is backed by a revolving pool of insurance premium finance loans.
The trust has a right to receive unearned premium amounts on insurance policies if borrowers do not repay the loans, and this right secures the notes, according to Moody's Investors Service, which will assign ratings to the notes.
Another inherent quality about insurance premium loans acts as a credit guardrail and helps maintain cash flow to the notes, according to Moody's. The insurance policies are important to borrowers, so they are more likely to be diligent about keeping up repayment on the loans.
The pool of loans is also granular and diverse, as each borrower accounts for less than 0.4% of the pool's principal balance. Another credit positive is that the pool is diversified according to insurance companies. The top 13 insurance companies account for 28.3%, and Moody's adds that it rates six out of the top 13, giving them ratings between A3 and Aa3.
While the deal has a revolving period, the trust also has protections against adverse changes in the collateral pool, and the sponsor and servicer are both experienced, according to Moody's. UMB Bank is a backup servicer on the deal, the rating agency said.
Although IPFS is highly experienced in this area, having been formed in 1977 and being one of the largest specialty lender of this type in the country, its singular business model leaves it vulnerable to stressful economic conditions. Should the company default, that event could disrupt the timely cancellation of associate policies, collection of the unearned premium and return the latter to the issuer, Moody's explained.
Although the loans were extended to borrowers in all 50 states and Canadian provinces, half of the pool is concentrated in four states, leaving the collection of loan repayments vulnerable to local economic disruptions, the rating agency said.
The pool has limited exposure to borrowers based in Canada, some 5.0%, which sounds like it exposes the pool to only limited risks. Those notes could be exposed to foreign exchange risk, however, if the value of the Canadian dollar falls significantly, Moody's said.
