Revenue from device payment-plan (DPP) agreements will collateralize $954.5 million in asset-backed securities (ABS) in a deal that Verizon Master Trust Series 2021-2 is preparing to bring to market.
Cellco Partnership and other Verizon affiliates originated the agreements, which are contracts with 24- and 30-month terms. The 2021-2 transaction is Verizon Communication’s second issuance from VZMT and the company’s 15th time floating ABS debt backed by DPP revenue, according to Fitch Ratings, which expects to rate the notes.
The transaction has a three-year revolving period. Although Fitch’s default assumption for the pool is 3.6%, the rating agency assigned a base case default rate of 4.21% to account for the revolving period. The rating agency also applied a stress multiple of 5.5x for consumer portfolios and 6.0x for business portfolios. Fitch noted that a customer and business payment behavior could be negatively affected by a Verizon insolvency.
While the trust is exposed to potential for degraded performance during the revolving period, Fitch pointed out that obligors tend to prioritize DPP payments. This has contributed to a stable default performance history for Verizon’s prior securitizations.
RBC Capital Markets is the lead underwriter on the deal, and created a capital structure with three classes. Fitch expects to assign ratings of ‘AAA’ to ‘A’ on the notes. The $850 million class A notes have a credit enhancement level of 20.8%, while the class B and class C notes have credit enhancement levels of 15.9% and 11%, respectively.
All the notes have a legal final maturity of April 2028.
On a weighted average (WA) basis, the underlying accounts have 21 months left on the accounts, and customers have a FICO score of 705.
Geographically speaking, the pool is diversified. California accounts for the state with the highest concentration of revenue, with 10.8%. Texas followed with a 6.5% concentration and Florida, with a 6.3% representation.
Fitch noted that the underlying collateral carries device payment upgrade risk. After obligors pay down 50% of the original balance of the DPP, the borrower is eligible to trade in the phone for a new unit. In such cases Verizon will remit the remaining balance to the trust.
The risk to the securitization is that if Verizon is ever in financial distress if could potentially continue accepting upgrades of the devices without remitting required payments to the trust. Fitch noted that Verizon mitigates that risk by terminating the upgrade offer within 10 business days after receiving notification that it has failed to remit any upgrade payments to the trust.
