Verizon has tweaked its next handset securitization in order to include finance contracts with longer terms.
The $1.2 billion transaction, dubbed Verizon Owner Trust 2017-3, is backed by contracts with credit characteristics broadly similar to the wireless carrier’s previous deal. The pool has a weighted average FICO score of 706 and a weighted average remaining contract term of 20 months.
However, the requirement of a maximum original term of 24 months has been replaced with a maximum remaining term to maturity of the same length; this allows the transfer of receivables with an original term of longer than 24 months, according to Fitch Ratings.
Contracts with longer original terms expose investors to additional risk, since the contracts are outstanding longer and, should they default, would have a higher remaining balance than more seasoned contracts. However, Fitch thinks this additional risk is mitigated by other underwriting criteria that require obligors to be current on payments until there are no more than 24 months left until maturity. Also, all other credit criteria are the same as for 24 month contracts, which ensures that longer terms are not being used for obligors of lower credit, as they are with other consumer loans.
Fitch expects 3.9% of the contracts to default, in its base-case scenario, up slightly from 3.8% in Verizon’s previous deal. This reflects a slightly different mix of customer tenures: a higher percentage (13.72% vs 11.44%) have been customers for six months or less. In recent deals, losses experienced on this cohort have been higher than Fitch initially expected.
The rating agency considers 32% of obligors in the pool to be subprime, and this could grow to more than 50% before a pool composition test is breached. However, the higher risk of exposure to subprime borrowers can be offset if the borrowers are long-time customers.
Another key change is apparently intended to attract new investors: the latest deal will issue a floating-rate tranche of senior notes, in addition to a fixed-rate tranche. This creates some interest rate risk, since the receivables pay fixed rates.
But there is an interest rate cap derivative, provided by Bank of America Merrill Lynch, the deal’s underwriter.
Also, the deal’s floor credit enhancement and pool composition tests allow for a higher share (50% and 55%, up from 40% and 45% in previous VZOT deals, respectively) of receivables with obligors that have a FICO score below 650 (or no FICO).
The two senior tranches have yet to be sized, but together will total $500 million, and both will benefit from 29.55% credit enhancement. There are also two subordinate tranches: $90.9 million of notes with 23.06% credit enhancement are rated AA and $91.8 million with 16.5% credit enhancement are rated A.
This is Verizon’s fifth deal overall; to date it is the only carrier in the U.S. to securitize handset financing, though bankers estimate annual issuance could grow to $15 billion to $20 billion a year once other carriers follow suit. Securitization offsets the increasing expense of allowing customers to pay for smart phones and tablets in installments, often with no down payments.
