PFS Corp. is preparing a $200 million securitization of loans used to finance insurance premiums, according to Moody's Investors Service.

PFS Financing Corp., Series 2016-B will issue two tranches of fixed-rate notes: a $188 million senior tranche that is provisionally rated ‘AAA’ and a $12 million subordinate tranche is unrated. All of the notes are expected to mature in October 2019.

The notes are the nineteenth issued from a master trust that allows the issuance of multiple series of notes of varying amounts and coupons. Following the issuance of the Series 2016-B notes, the issuer will have six series of term notes totaling $2 billion and four or five series of variable funding notes totaling $575 million to $700 million outstanding.

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.  As of 31 July 2016, the pool included approximately 359,000 loans totaling $2.4 billion. About 87% of the principal balance of the pool had remaining payment terms of nine or fewer months, while 99.29% of the pool’s balance had fewer than 12 payments remaining

Among its rating consideration, Moody's cited the fact the insurance policies are essential to the operations of the business obligors, giving them a strong incentive to make payments. “The quality of the underlying collateral of insurance premium finance loans and the rights to collect the unearned premium from the insurance carrier upon borrower default have resulted in low historical net charge offs, ranging from 0.17% to 0.47% of receivables over the pasts even years,” the presale report states. “If an obligor defaults, the servicer can cancel the policy and the securitization will receive a refund of the unearned premium from the insurance company that issued the policy.”

The pool of loans is granular; each obligor comprising less than 1% of the pool. Over 99% of obligors have less than 12 months of payments remaining on their installment loans and over 80% of obligors have a current loan balance less than $5,000.  Moreover, the credit quality of the insurance companies that issue the policies is strong.

However, the fact that IFS operates a single line of financing, insurance premiums, leaves it vulnerable to stressed economic conditions. This increases the risk of servicer disruption. “A default by IPFS can result in losses for the transaction if it extends the time between the default of a small business obligor and when IPFS cancels the relevant insurance policy to collect the unearned premium,” the presale report states.

Wells Fargo Bank is the trustee and backup servicer.

Editor's Note: an earlier version of this article misidentified the rating agency.

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