SFIG Vegas: What ever happened to rush of U.S. handset ABS?
When Verizon issued its debut handset securitization in 2016, it generated some buzz. There were expectations that other U.S. carriers would follow suit, resulting in a new asset class with significant size.
Yet three years later, Sprint, T-Mobile and AT&T have yet to securitize device plan purchase agreements, despite the potential benefits.
“Across the industry, there are other priorities,” said Chris Jonas, the direct of ABS banking for Bank of America Merrill Lynch. “Some of the carriers are focused on managing their debt load, so it probably is incongruent to say we’re going to add a new debt product as part of the process.”
Jonas, who was addressing a Structured Finance Industry Group conference in Las Vegas, added, “You have carriers that are focused on M&A priorities right now. It’s hard to incorporate a new very public piece of the capital structure to do term ABS.”
Two of those carriers, T-Mobile and Sprint, have in the past expressed interest in using term ABS as a cheaper alternative to bank funding. But last year the carriers formally filed plans for a $26 billion merger that’s under regulatory review with the Federal Communications Commission.
Since 2012 wireless carriers have been weaning customers off of subsidized phone-contract plans in favor of device-payment installment plans providing zero-percent financing or leasing of phones, usually over a period of two years with no down payment.
This ties up a significant amount of capital. Devices produced by Apple, Samsung and other phone manufacturers are growing increasingly expensive. (Samsung on Feb. 20 announced its new line of Galaxy phones that includes a 5G-network capable phone with a folding screen - the Galaxy Fold - that will be priced at approximately $2,000.)
Bundling device payments into collateral for bonds frees up capital, and the financing can be matched to the term of the payment plans. DBRS and Moody’s have both speculated that the big four carriers could issue approximately $40 billion a year (in 2015 figures).
But establishing a handset securitization platform is no piece of cake, said Jonas.
While Verizon has proven their utility, “any issuer knows it takes a lot to get to point A to point B,” said Jonas. “So I would say you have to figure out where are the corporate priorities." Upper management must sign off, carriers must work out arrangements with ratings agencies, and the finance and legal teams must learn the due diligence process “soup to nuts,” Jonas said. “And servicing afterwards is a process that is probably overlooked.”
Kee Chan Sin, an assistant treasurer in capital markets and corporate finance for Verizon and another panelist, said term ABS has allowed the company to reduce its overall funding costs for the millions of phones, tablets and other devices it finances for consumers. “We are able to take that receivable and securitize it in the term market, which right now is very attractive from a cost of funds,” Sin said.
He did not offer an opinion about his competitor's funding strategies.
Verizon's latest deal hit the market on Monday: The $1.22 billion Verizon Owner Trust (VZOT) 2019-A will have an initial pool of more than 3 million accounts with a remaining principal balance of $2.39 billion. Like previous deals, the collateral will revolve over a two-year period in which 24-month, prime-level account receivables will be added to the pool as other accounts are paid off during their average remaining installment payment schedule of 21 months.
The $500 million tranches of Class A notes, one fixed-rate and one floating-rate, will have preliminary triple-A ratings from Fitch Ratings, S&P Global Ratings and Moody’s Investors Service.
The deal’s subordinate tranches are a $69 million, double-A rated Class B tranche and a single-A rated Class C notes tranche sized at $53.3 million.
Since it started issuing deals in 2016, Verizon’s credit enhancement levels have declined as the performance of the nascent asset class proved resilient against losses – bearing out the theory that consumers are less likely to default on a DPPA since that would disrupt their cell-phone service. Total initial CE for the latest deal is 21.25%, down from from 30.6% for the initial deal issued three years ago.
Underwriters on the new deal include Citigroup, Mizuho, RBC and Wells Fargo.