Sprint Corp. is set to become the first U.S. telecom operator to tap the securitization market to help offset the expense of providing customers with financing for mobile phones.
Wireless carriers are increasingly embracing plans that let customers pay for devices in installments, often with no down payment. Since the carriers must pay vendors for the equipment upfront, these plans tie up a lot of working capital, particularly for expensive smartphones. Securitization offers a way to free up working capital by selling the rights to future installment payments.
Importantly, securitization investors would also have the right to funds recouped by selling devices when customers turn them in at the end of their contracts.
Marcelo Claure, Sprint’s chief executive, explained during the company’s Aug. 4 earnings conference call that monetizing the “very high-end residual value” of the devices along with the leases would essentially “neutralize” Sprint’s cash expenditure as the handsets are sold.
U.S. carriers are already tapped into accounts receivables factoring facilities with banks to offset the expense of equipment installment plans. In March 2014, T-Mobile set up a $500 million equipment receivables factoring facility, while AT&T had factored over $4 billion of gross equipment receivables throughout 2014, according to research published by rating agency DBRS.
Securitization gives carriers access to a broader investor base, which could help lower the cost of financing (depending on demand for the bond). It can also provide longer-term financing than factoring facilities, which is better suited to short-term cash needs.
“The way we're setting up this facility is very different, because on traditional installment billing, all you had to do was basically sell receivables,” Claure said during the conference call. “And for this we had to leverage our partner, SoftBank, Brightstar, in order for us to be able to sell these receivables but receive profits that are equal to a net present value of not only the lease, but very important also the residual value of the handset.” .
SoftBank acquired a majority share in Sprint in 2013.
Sprint Chairman Masayoshi Son, who master-mined installment-based payments for the handset over at SoftBank in Japan eight years ago, noted on the call that cellphone vendors typically require payments within 30 days, while Sprint allows customers to spread payments out over two years. The combination, he said, can put a major dent on cashflows. At SoftBank, the solution was to securitize the handset accounts receivables.
Claure said that Sprint has been working with SoftBank and other partners to set up a leasing company that will finance these customer devices on attractive terms. The arrangements will be finalized in the coming months; SoftBank is expected to be a minority equity investor in the leasing company.
Equipment plans are becoming more prevalent in part because wireless customers are switching carriers more often.
"It used to be that these companies would include the phone for free as part of contract that locked borrowers in for a long term," Chris D’Onofrio, senior vice president of ABS Structured Finance at DBRS, said in a telephone interview with ASR. "Switching between carriers was less appealing then, since customers were required to change their phone number."
With the advent of wireless number portability in 2004, absorbing the cost of a phone became less attractive for providers, since they weren’t as certain to lock in customers, and cash flow, over a long term.
“Now providers help borrowers finance phones by giving them a 0% loan in order to buy the phone,” said D’Onofrio. “As long as you pay your phone in full, you can take it and go somewhere else.”
Carriers are employing billions of dollars to finance these EIPs. According to research published by DBRS in March, the four major U.S. carriers (Verizon, AT&T, Sprint and T- Mobile) are expected to help subscribers finance close to $40 billion of devices this year.