Presale:
PFS Financing Corp. (Series 2017-A)
This presale report is based on information as of March 30, 2017. The ratings shown are preliminary. This
report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may
result in the assignment of final ratings that differ from the preliminary ratings.
!" # !
# # # Preliminary Ratings
Class
Preliminary
rating(i)
A
AAA (sf)
B
A (sf)
Preliminary Note
Expected final
amount (mil. $) interest (%) maturity
Legal final
maturity
282.00 TBD
March 15, 2019
March 15,
2021
18.00 TBD
March 15, 2019
March 15,
2021
(i)The rating on each class of securities is preliminary and subject to change at any time. TBD--To be
determined.
Profile
Expected closing date
April 2017.
Collateral
Insurance premium finance loans.
Issuer
PFS Financing Corp., a Missouri corporation.
Servicer
IPFS Corp.
Trustee and backup servicer Wells Fargo Bank N.A.
Rationale
The preliminary ratings assigned to PFS Financing Corp.'s $300 million premium finance
asset-backed floating-rate notes series 2017-A reflect our opinion of the credit
enhancement in the form of overcollateralization and available excess spread related to
PFS Financing Corp.'s historical portfolio loss performance and the credit quality of the
Primary Credit Analyst:
Jay Srivats, San Francisco (1) 415-371-5045; [email protected]
See complete contact list on last page(s)
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pool's insurance carriers. The preliminary ratings also reflect the servicer's ability to service the portfolio, which we
believe is in-line with its historical performance.
Transaction Overview
PFS Financing Corp., a bankruptcy-remote, special-purpose Missouri corporation (the issuer), was organized in 1993.
The issuer is a wholly owned subsidiary of IPFS Corp. (IPFS). The issuer has a number of outstanding rated term notes
and revolving short-term debt; its premium finance loan portfolio is the collateral asset pool backing this debt.
IPFS, the originator and servicer, completed six acquisitions from 2006 to Feb. 19, 2010. It most recently acquired
assets from Universal Premium Acceptance Corp. (UPAC) in December 2009 and from American International Group
Inc.'s (AIG's) property/casualty premium finance subsidiaries in February 2010 (these AIG subsidiaries, collectively
referred to as the AICCO portfolio, included AICCO Inc., a Delaware corporation; A.I. Credit Corp., a New Hampshire
corporation; AICCO Inc., a California corporation; Imperial Premium Funding Inc., a Delaware corporation; AIG Credit
Corp. of Puerto Rico, a Delaware corporation; and A.I. Receivables Transfer Corp., a Delaware corporation). IPFS
began implementing an integration plan in March 2011 and rebranded itself as "Imperial PFS" on June 1, 2011. The
sellers have offices at 24 locations in 18 states in the U.S. plus Puerto Rico with approximately 469 employees. As of
Jan. 31, 2017, they made 566,000 loans aggregating $7.63 billion. The average premium during the same period was
approximately $13,500.
Strengths
In our view, the transaction's strengths include:
•
•
•
•
IPFS has a strong history of originating, underwriting, and servicing collateral;
The recoveries for defaults on insurance premium loans remain relatively high;
Excess spread (which may vary) can act as additional credit enhancement;
The required reserve (initially set at 10.00% for class A and 4.25% for class B, which is used to determine the
required reserve amount) increases depending on various trigger events; and
• Shared excess principal collections may be available to cover any interest or principal shortfalls because all
outstanding series, including series 2017-A, share the same collateral portfolio.
Weaknesses
In our view, the transaction's weaknesses include:
• The amount of shared excess principal available for covering any shortfalls is prorated among the various issuances
and may not be sufficient to cover the shortfall amount for any one series;
• The issuer must (if able) redeem the notes in full on the scheduled pay-out commencement date through a
refinancing; and
• Additional future issuances may affect the notes' subordination and change the pool's concentration limits, which
would affect the pool's credit quality.
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Mitigating Factors
In our view, the transaction's weaknesses are mitigated by:
• The deal has a high gross portfolio spread and high recovery on defaults;
• Our portfolio review showed that the required reserve amount could cover the estimated defaults and a certain
amount of unexpected losses;
• A failure to refinance would, at most, lead to a rapid amortization event (i.e., the note principal would begin to be
repaid); and
• Any additional issuance is subject to S&P Global Ratings' review.
Sector Outlook
Small businesses' need for the sellers' premium financing generally increases during a recession. Commercial insurance
pricing and the overall state of small business obligors are also key drivers for this financing.
Although we believed that the pace of reserve releases would likely diminish in the next couple of years, reserve
releases have remained robust. However, much of commercial lines insurers' recent reserve releases came from the
last hard market cycle, so we expect further such releases to be much smaller. We continue to believe that insurers
that prematurely release reserves for long-tail lines and from recent years could experience reserve deficiency in the
years ahead.
We monitor inflation because higher prices can inflate claim costs faster than property/casualty (P/C) insurers can
update premium rates. Higher inflation that accompanies increased interest rates may also affect asset valuations.
Therefore, we believe inflation represents medium to high risk to the P/C insurance industry, especially to
longer-tailed lines of business.
Structural Analysis
The issuer's loan pool has collateralized all outstanding series of notes. Any interest and principal payments to each
series will be allocated from the pool's collections based on the proportionate size of the series' note balance,
unreimbursed charge-offs, and overcollateralization (each series' investor interest in the pool). The excess of the pool's
balance over the sum of all the series' investor interests is the portion of the pool that is not allocated to any specific
series (the issuer interest).
The series 2017-A transaction structure includes a two-year revolving period ending in March 15, 2019, during which
the issuer will not use principal collections to reduce the notes' principal balance. Instead, they may be distributed to
the noteholders of other series, deposited into the excess funding account and subject to specified conditions, used to
repurchase additional collateral for the pool, distributed to IPFS as a dividend (as long as the issuer has a net worth of
at least $25 million), or used to pay other issuer expenses that the transaction documents permit. Rapid amortization
events may occur, whereby the deal does not reserve further amounts and pays according to a fixed investor interest.
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A failure to pay the notes in full on the legal final payment date is an event of default.
Class B note interest will not be paid on any payment date until the class A monthly interest for that date has been
paid in full. Class B note principal will not be paid until monthly interest and principal payable to the class A
noteholders have been paid in full.
The servicer may choose to purchase the notes on any payment date on or after the payment date when the investor
interest is reduced to an amount less than or equal to 10% of the initial note principal amount. The issuer is also
required (if able) to redeem the notes in full on the scheduled pay-out commencement date through a refinancing. The
purchase price in both instances would be the note principal and accrued and unpaid interest on the notes through the
day preceding the redemption date, plus any other amounts payable to the noteholders.
Transaction Collateral
The notes are backed by insurance premium loans, which are typically installment loans with a duration of less than
one year and that usually cover a high percentage of the premiums financed. The security for the loans is the unearned
premium balance that the insurance carrier owes if the underlying policies are canceled. We believe the main source of
repayment is the insurance carrier because if the insurer remits the unearned premium payment on time, there should
be no loss. As a result, we do not analyze the borrowers but instead focus on the credit quality of the insurers providing
the underlying policies. Although the borrower remains liable to repay the loans, the insurance carrier must refund
unearned premiums if the borrower were to default on the loan (because such a default would lead to the underlying
policy's cancellation). This means that for the loans to experience a loss, both the borrower and the insurance carrier
would have to default. Although the insurance carriers owe certain payments that are backed by state insurance
guarantee funds in the event of the carriers' insolvency, we believe receiving those funds could be delayed. As such,
when analyzing the credit quality of the insurance carriers in the portfolio, we assign a recovery rate to the defaulted
carriers' obligations that we discount to reflect the recovery timing.
Another issue relating to losses on premium finance loans is broker/agent fraud in origination. S&P Global Ratings
reviews the underwriting and collection process and believes that competent loan servicing is critical in mitigating this
risk. We expect the servicer to service the portfolio in line with its historical performance because it has not
experienced any significant fraudulent cases since 2010.
Eligibility Parameters And Pool Characteristics
Based on the preliminary offering memorandum, the portfolio contains about $2.36 billion in premium finance loans
(see table 1).
Table 1
Portfolio Characteristics
Portfolio size ($)
2,353,200,531
Overdue receivables 1-29 days (%)
0.92
Overdue receivables 30-89 days (%)
0.58
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Presale: PFS Financing Corp. (Series 2017-A)
Table 1
Portfolio Characteristics (cont.)
2,353,200,531
Portfolio size ($)
Overdue receivables 90-179 days (%)
0.35
Overdue receivables 180 days and over (%)
0.10
Current receivables balance (% of total balance)
$0-$4,999
15.73%
$5,000-$9,999
9.10
$10,000-$24,999
13.84
$25,000-$49,999
11.16
$50,000-$99,999
11.30
$100,000-$499,999
23.01
$500,000 or more
15.86
Total
100.0
Remaining installments (% of total balance)
Nine payments or less
86.08
10-11 payments
12.94
12-24 payments
0.91
More than 24 payments
0.07
Agent concentration (% of total balance)
Top three agents
10.90
Top five agents
14.64
Top seven agents
17.20
Top five geographic concentrations (% of total balance)
California
14.61
Texas
12.95
New York
11.44
Florida
6.05
New Jersey
4.87
The loans are used to finance a wide variety of policies that cover general liability, commercial property, professional
liability, and automobile insurance.
Loans that are transferred to the issuer's pool must satisfy eligibility criteria that address loan maturity and minimum
down payment requirements, according to the transaction documents (see table 2). In addition, eligibility is further
constrained by certain concentration limits that generally address the insurance carriers' diversity and credit quality.
Table 2
Portfolio Constraints
Parameter
For values
Constraint
Policy term
Original policy term: under 18 months/18-23
months/24-35 months/36 months
Minimum down payment: 8.33%/7.00%/5.00%/5.00%
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Table 2
Portfolio Constraints (cont.)
Parameter
For values
Constraint
Insurance obligor
concentration
maximums(i)
S&P Global Ratings' credit rating on insurance
obligor: at least 'A+'/at least 'BBB+'/at least
'BBB-'/less than 'BBB-'
Maximum percentage of outstanding obligations:
9.0%/7.0%/4.0%/2.0%
Carve-out for largest
insurance obligor
N/A
Maximum 10.0%
Minimum rating bucket
'BBB+' by S&P Global Ratings or 'Baa1' by
another rating agency
At least 60.0% of the portfolio has an insurance obligor rated as
such
A single direct obligor
N/A
If 85.0% of the policies have insurance obligors that are rated
'BBB' or higher, 2.0% of the portfolio; otherwise, 1.0% of the
portfolio
Single producer
N/A
Maximum 4.0%, except for designated producers that are
specifically named in the transaction documents
Carve-out for designated
producers
Three named producers (agents) are allowed to
have larger percentages
Specified at 8.0%/7.5%/6.0%
Canadian direct obligors
N/A
Maximum 3.0% of the portfolio
Government agency direct
obligors
N/A
Maximum 2.0% of the portfolio
No. of installments
N/A
Maximum 3.0% of the portfolio allowed for more than 11
installments
Personal lines of insurance
N/A
Maximum 3.0% of the portfolio
Four largest insurance
obligors
N/A
Maximum 24.0% of the portfolio
Financed receivables rate
Over any three-month period
The ratio of new loans to total premiums must remain below
85.0% (at least a 15.0% down payment on the premium loans)
(i)Unless indicated, these rating levels allow for other agency ratings. N/A--Not applicable.
Credit Analysis
Credit support for the notes will be provided by overcollateralization via the required reserve amount. The transaction
includes certain performance triggers that, if breached, will increase the required reserve percentage or add reserves
and, as a result, increase the credit support available to the notes.
The performance triggers for class A's required reserve percentage (which is initially 10%) are:
• If the three-month rolling average defaulted receivable rate exceeds 1.0% or if the percentage of insurance
companies in the pool that are in liquidation, conservatorship, or rehabilitation (for more than 180 days) exceeds
3.5%, the required reserve percentage steps up to 12.0%;
• If the percentage of insurance companies in the pool that S&P Global Ratings rates 'AA-' or higher is less than
12.0%, the required reserve percentage steps up to 11.0% (until the percentage of 'AA-' or higher-rated insurance
companies increases to at least 12.0% for three consecutive months); and
• If the net portfolio yield averaged in three consecutive months is less than 3.0%, reserve 1.5x the difference between
3.0% and the average net portfolio yield in such three months (until the net portfolio yield is at least 3.0% for six
consecutive months).
The performance triggers for class B's required reserve percentage (which is initially 4.25%) are:
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• If the three-month rolling average defaulted receivable rate exceeds 1.00% or if the percentage of insurance
companies in the pool that are in liquidation, conservatorship, or rehabilitation (for more than 180 days) exceeds
3.50%, the required reserve percentage steps up to 6.25%;
• If the percentage of insurance companies in the pool that S&P Global Ratings rates 'AA-' or higher is less than
12.00%, the required reserve percentage steps up to 5.25%; and
• If the net portfolio yield averaged in three consecutive months is less than 3.0%, reserve 1.5x the difference between
3.0% and the average net portfolio yield in such three months (until the net portfolio yield is at least 3.0% for six
consecutive months).
The issuer will increase credit support by allocating loans or funds on deposit in the various accounts from the issuer
interest (the portion of the pool that isn't allocated to any series of notes) to the series 2017-A investor interest. If the
loans and funds available in the issuer interest are insufficient to meet the required increase in the series 2017-A
investor interest within a defined timeframe, the transaction will enter into a rapid amortization mode whereby the
issuer will allocate all available funds to pay down the note principal.
If any of the following issuer pay-out events occur, all series of notes will begin rapid amortization:
• Any seller or the servicer becomes bankrupt;
• All of the sellers become unable to transfer the receivables to the issuer according to the purchase agreement,
continuing for three business days after the issuer or any seller is notified;
• The issuer or any seller becomes an "investment company" under the Investment Company Act of 1940, as
amended; and
• The aggregate deposit in the trust accounts exceeds 66.67% of the aggregate principal receivables at any time.
Any of the following events will lead to a series pay-out event, which may trigger rapid amortization:
• The issuer fails to pay any monthly interest (including deficiency and additional interest), the proportion of trustee
fees and expenses, servicing fees, and any deferred fees and expenses, and this failure is not remedied within the
grace period;
• The issuer breaches any covenants or agreements detailed in the transaction documents, and this failure is not
remedied within the grace period (except for a representation or warranty breach related to a receivable, the
servicer will receive a deemed collection and all accrued and unpaid interest);
• The issuer provides an incorrect representation or warranty, and it is not remedied within the grace period (except
for a representation or warranty breach in the transaction documents related to a receivable, the servicer will
receive a deemed collection and all accrued and unpaid interest);
• The issuer, any seller, or IPFS becomes subject to any bankruptcy or voluntary payment suspension;
• The issuer cannot pledge receivables to the trust (for reasons other than because the sellers determine not to sell
receivables to the trust);
• The issuer, any seller, or IPFS becomes an "investment company" under the Investment Company Act of 1940, as
amended;
• A servicer defaults, and that default is not remedied within the grace period;
• The three-month rolling average of the net portfolio yield falls below 0.75%;
• The monthly defaulted receivables rate exceeds 1.50% in any one month;
• The three-month rolling average monthly payment rate falls below 15.00%;
• In any one month, the aggregate adverse determination receivables and those for which a deemed collection has
been received equals or exceeds 10.0% of the sum of all receivables and adverse determination receivables for
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•
•
•
•
•
•
•
•
•
•
•
which a deemed collection has been received;
Certain cross-default provisions apply to the sellers or servicer;
The trustee fails to have a valid and perfected first-priority security interest in the receivables and related security;
The coverage test is not satisfied, or the required reserve amount cannot increase for specified periods;
The issuer or any seller faces certain impositions of tax liens;
There is a change in control of IPFS;
A purchase termination event under the purchase agreement occurs;
An event of default under the indenture occurs;
The issuer fails to pay out the notes in full on the legal final maturity date;
The average of loans to total premiums initiated in any three-month period exceeds 85.00%;
A pay-out event occurs under any other series; and
The servicer cannot transfer the receivables' collections or proceeds to the issuer.
Our analysis for premium finance transactions produces expected loss levels at different ratings through a combination
of three different inputs, which are weighted differently:
• Historical annual net defaults (the average has been about 0.298% in the past 15 years), which are stressed by a
multiple depending on the rating scenario;
• A loss caused by a default of the largest insurance carrier, as assessed by S&P Global Ratings, as well as affiliates
that are rated within a notch of the parent, the financial strength rating of which is four or more notches below the
rating scenario. In this leg, we assume a high recovery level because the issuer, as the holder of the right to collect
the unearned premiums, would receive a high ranking among the creditors of an insurance company under
receivership; and
• A loss caused by a default of all the carriers with a financial strength rating four or more notches below the rating
scenario. Again, we assume a high recovery level.
Given its revolving nature, the portfolio may become more concentrated, become more diversified, or maintain its
current insurance carrier concentration level. As such, a worst-case portfolio based on the concentration limitations
shows that the deal would be susceptible to volatility in its concentrations.
Based on the transaction's credit support levels, we believe that the notes will be paid timely interest and ultimate
principal in full by the legal final maturity date.
Related Criteria And Research
Related Criteria
•
•
•
•
General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
General Criteria: Understanding Standard & Poor's Rating Definitions, June 3, 2009
Legal Criteria: Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006
Criteria - Structured Finance - ABS: Standard & Poor's Updates Its Approach To Rating U.S. Insurance Premium
Loan Securitizations, April 28, 2005
Related Research
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic
Factors, Dec. 16, 2016
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In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are
generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When
Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing
Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace
Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology
And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012;
"Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, 2009.
Analytical Team
Primary Credit Analyst:
Jay Srivats, San Francisco (1) 415-371-5045; [email protected]
Lead Analytical Manager, U.S. Commercial Credit:
Winston W Chang, New York (1) 212-438-8123; [email protected]
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