Verizon Wireless is launching its third bond sale this year backed by receivables of device-payment plan agreements with customers.
According to presale reports, Verizon Owner Trust 2020-C is a $953 million transaction featuring an $850 million Class A tranche with preliminary AAA ratings from S&P Global Ratings and Fitch Ratings.
Also being offered are $58.6 million in Class B notes (rated AA+ by S&P and AA by Fitch) and $45.3 million in Class C notes (A+/A).
Like previous deals, the trust will have a revolving pool of assets for up to two years, in which sponsor Cellco Partnership (doing business as Verizon Wireless) can replace paid-off agreements with new agreements that meet minimum pool standard requirements.
The Class A notes have initial hard credit enhancement of 21.25%.
The deal is the 13thsuch DPPA securitization by Verizon since 2016. Verizon uses the proceeds to fund purchases of new handset devices (including phones and tablets) it sells to customers for new lines and upgrades. The new deal, expected to close Nov. 2, arrives as Apple Inc. is readying the launch of its new iPhone 12 series of devices that are expected to generate high demand.
VZOT 2020-C involves 2.65 million in device receivables from 2.4 million consumer accounts, with an aggregate principal balance of $1.42 billion (originally $1.97 billion). The average monthly device payment is $31, and the average remaining installment period is 20 months.
The weighted average FICO is 704, in line with prior Verizon deals, but the pool has a 33.2% share of customers with FICO scores below 650 or with no FICO score. That segment can be as much as 40% based on revolving period composition tests.
New device agreements added to the pool will have minimum credit-quality requirements, such as a FICO of at least 700 and shorter-tenured customers (less than 12 months) cannot total more than 22% of the pool balance.
The sponsor will cover the cost of a remaining balance of an agreement in the pool if a customer upgrades a phone early under a Verizon promotion.
Fitch’s default assumption for the current pool is 3.3%, but assigned a base-case default rates of 3.99% and 4.45% for the two worst case portfolios because of the uncertainty of the pool composition at any point during the revolving period. It expects handset payment performance to be in line with prior deals, although Fitch acknowledges the potential economic disruption the ongoing coronavirus pandemic could have on borrowers.
S&P has an expected loss rate of 3.8% based on the floor credit enhancement composition test, but 4.2% for the pool composition tests under the assumption that the “pool’s composition will migrate to the lowest credit quality allowable.”
