New US Cell Phone Securitization Positive for Carriers
Published on: 14th Nov 2016
The advent of cellular equipment installment plans (EIPs) and the securitization of pools of the payments on those plans diversifies cell phone carriers' financing, provides liquidity and can lower carriers' overall financing costs, Fitch Ratings says. EIPs can also provide transparency to consumers in terms of device cost, rather than having carriers heavily subsidizing it.
Fitch considers handset financing a financial operation and, provided enough information is available, will deconsolidate such financial services debt in its analysis. The deconsolidation makes the carrier more comparable to an issuer without EIPs.
Fitch rated the first public securitization of EIPs, Verizon Owner Trust 2016-1, in July and expects to rate Verizon Owner Trust 2016-2, which is currently marketing. We rated the highest series of the 2016-1 trust 'AAAsf', and expect the same for 2016-2. Verizon may contribute additional receivables to the trusts, rather than pay off the bonds, for up to two years, after which the trust will pay down for an additional two years. The transactions give Verizon additional flexibility by allowing for two levels of asset quality, corresponding to two levels of required credit enhancement.
While not directly linked, these transactions have greater exposure to the credit profile and market position of the issuer than other consumer loan transactions. If Verizon Communications Inc. (A-/F2/Stable) were downgraded, particularly to speculative grade, it could affect Fitch's credit ratings of the notes. We believe that borrower payment behavior could change significantly if the associated network is dissolved or large segments of it are divested.
However, those eventualities are unlikely as Verizon has a strong competitive position, low churn rates, high margins and extensive network coverage. The dissolution of its network is also a remote risk as it has been acquiring assets that broaden it this year. Verizon bought XO Communications' fiber network, which will likely close in first-quarter 2017.
Since 2013, cell phone carriers have shifted away from subsidizing their customers' purchases of their cell phones and toward financing those costs with loans or leases. This creates a distinct receivable, separate from the contract on the wireless service, which can be pooled into a securitization. The carrier may then issue debt with exposure to its broad book of customers.