For investors who were intrigued by the launch of Verizon’s first-ever handset securitization offering in July, one of the deal’s underwriters has a message: Stay tuned.
“We are bullish,” said Eric Shea, an executive director with Mitsubishi UFJ Securities said on a handset panel at IMN’s ABS East conference. “We do expect to see more issuance in the sector and expect to see it across more than one carrier.”
Joseph Lau, managing director at RBC, echoed that sentiment. “While we haven’t seen a lot [of issuance] to date, certainly we do anticipate there’s going to be a lot of continued buzz,” he said.
Shea estimates that Verizon, AT&T, T-Mobile and Sprint could collectively issue $15 billion to $20 billion of securities a year backed by financing for mobile phones and tablets.
By comparison, credit card companies tap the securitization market for some $30 billion a year, while issuance of bonds backed by auto loans and leases totals some $50 billion a year.
So far, though, Sprint is the only other carrier to announce plans to tap the securitization market.
Panelists also discussed the challenges in structuring and rating the new asset class.
For instance, Raffi Dawson, a managing director at Mizuho Americas, said the bank had to cobble together cell-phone service receivables data dating back to 2007 to measure indicators of strong customer account performance that would likely translate to the new business model. The bank found a strong performance correlation between satisfactory accounts and the length of time a customer has been with a carrier. (An added plus, those accounts performed through a credit downturn cycle with the 2008 financial crisis).
The panelists said the receivables backing Verizon’s deal had similar structures to auto and credit card deals, which consumers typically prioritize because of the potential for repossession or suspension of charging privileges. For phones, the carrot (or stick) is the loss of service for a delinquent bill – and the fact the device loan is due and payable should a customer fail to fulfill a leasing period agreement.
That assured Deutsche Bank as the trustee for the deal, said Eileen Hughes, a director at Deutsche Bank. This allowed the bank to accept the deal without a backup servicer, normally a must-have in a consumer credit securitization – a decision also aided by Verizon’s investment-grade rating.
The deal still required Verizon to provide a relatively large credit enhancement level of 30.6%, the price of being a new asset class. That is just one of the criteria Verizon accepted to maintain the right to add more leases into the pool on a revolving basis as new accounts (including existing customer upgrades) are created.
Dawson noted there are also pool composition tests on the credit quality of borrowers (on top of a three-month average delinquency rate trigger that could terminate the revolving privilege, according to S&P’s presale report on the deal).