PFS Corp. is marketing its second securitization of the year of loans used to finance insurance premiums, according to Moody’s Investors Service.
The transaction, PFS Financing Corp. 2017-B, consists of a $282 million senior tranche provisionally rated triple-A, and an $18 million unrated subordinate tranche. Both tranches have legal, final maturities in July of 2022.
Collateral for the deal consists of loans made to small-to-medium sized businesses used for paying premiums on property and casualty insurance. The securitization also has a claim on the unearned portions of the premiums that the insurer must pay if the relevant insurance policy is canceled.
While all of the class-B notes pay a fixed interest rate, only some of the senior notes offer a fixed coupon; the others will pay a floating interest rate indexed to LIBOR. Most of the loans serving as collateral have fixed interest rates, resulting in an interest rate mismatch with the floating-rate senior notes.
The class-A notes benefit from a minimum of 10% credit enhancement as a percentage of the note principal balance per the transaction’s minimum reserve requirements. Subordination in the form of the class-B notes is 5.75%, and the senior notes also benefit from at least 4.25% overcollateralization. The minimum reserve requirement can be changed if either the three-month default rate on the loans exceeds 1%, or if the sum of all receivables for a liquidating insurance obligor rises to 3.5% of the total outstanding balance of all receivables.
The quality of collateral is strong. Moody’s acknowledged that the insurance policies are essential to the businesses, thereby incentivizing the obligors to make payments. Charge-off rates are at historical lows, ranging from 0.17% to 0.47% over the past eight years.
As of May 31st, the pool contained 363,482 loans, and each obligor comprises less than 1% of the total balance. More than 99% of all obligors have less than 12 months of scheduled payments remaining, and a significant majority (over 80%) has less than $5,000 outstanding on the loans. The average receivable balance in the pool is approximately $6,678
Insurance premium financing is the only service offered by IPFS, the parent company of PFS Financing. Moody’s noted that IPFS’ monoline business model exposes it to risk associated with stressed economic conditions. In the event of servicer default, if IPFS extended the time between an obligor’s default and its cancellation of the relevant insurance policy to collect the unearned premium, the transaction could yield losses. However, the presale states that IPFS has a “warm back-up servicing agreement” with Wells Fargo, which would assume all servicer duties between 30 and 90 days of an IPFS default.
Only one-third of the obligors in the pool are rated by Moody’s, and the rating agency noted that it might not be able to monitor the credit quality of those obligors. However, Moody’s assumes the credit quality of the pool to be stronger than other unrated asset classes due to high regulation of the insurance industry.
Formed in 1977, IPFS is one of the largest originators of property and casualty insurance in the United States. During the 12-month period ending May 31st, IPFS originated $7.72 billion in loans to finance insurance premiums.