AT&T raised another $1.7 billion this month by borrowing against handset financing it extends to customers, according to rating agency reports.
On Tuesday, both Fitch Ratings and DBRS assigned a single A to AT&T Receivables Funding December 2018 , which is backed by a static pool of device installment plan agreements that are originated and serviced by AT&T Mobility.
The collateral consists of agreements from AT&T's low and medium underwriting risk categories, with long weighted average customer tenure, according to Fitch; the rating agency expects 4.3% of the pool to default, in its base-case scenario, which does not account for the risk that a customer may upgrade to a new device.
Fitch's rating takes into account the limited performance history of the program and the rating agency's own view that customer payment behavior on the installment contracts could be negatively affected should AT&T become insolvent. In its report, Fitch noted that the investments "face greater exposure than other consumer loan transactions to the credit profile and market position of AT&T."
The transaction will benefit at closing from 18.15% credit enhancement, provided solely through overcollateralization.
In addition, there is some basis s risk because the handset financing used as collateral will pay bear a fixed rate, while the liabilities being created will bear a floating rate with a LIbor cap provided by Citi. This cap will be calculated through a fixed notional amortization schedule, which was modeled by Fitch in its analysis.
The pool of collateral is serviced by New Cingular Wireless PCS, doing business as AT&T Mobility, which has an extensive history of servicing cell phone contracts, per Fitch. "Due to this and AT&T's position as one of the largest wireless service providers in the United States, Fitch considers AT&T's servicing operations of cell phone contracts to be a strength compared with its peers," the report states.
With this transaction, AT&T has issued at least $6.7 billion of assets backed by handset financing through four transactions in 2018, including a $1.4 billion deal in September, a $1.4 billion deal in June, and a $2.3 billion deal in March, according to Fitch. That's nearly double the $2.65 billion the carrier raised via two deals rated by Fitch in 2017. Prior to that, AT&T issued a single Fitch-rated deal each in 2016 ($1 billion) and in 2015 ($1.5 billion).
All of the transactions to date have been rated single A, but the latest one benefits from slightly higher credit enhancement, presumably to offset higher level of expected defaults. Overcollateralization for the September deal, which has an expected default rate of just 4.1%, is 17.68%. Likewise, overcollateralization for the June and March deals is 16.6% and 16.8%, respectively; Fitch expects just 3.6% of the collateral for each of those deals to default.
