Verizon Wireless’ second handset securitization transaction is initially sized at $1.4 billion, according to presale reports.
That’s roughly the same size as the wireless carrier’s first deal, completed in July, which was launched at $1.2 billion but was upsized in response to strong demand.
Both deals are backed by financing that Verizon provides customers purchasing mobile phones and devices. Securitizing these assets frees up the company’s balance sheet, allowing it to put capital to work elsewhere.
Verizon Owner Trust (VZOT) 2016-2 will issue three tranches of notes: $1.2 billion in five-year Class A notes with a 30.46% credit enhancement and an expected ‘AAA’ rating from Fitch Ratings and Standard & Poor's; $100 million of Class B notes provisionally rated ‘AA’ by both agencies and another $100 million of Class C notes provisionally rated ‘A.’
The Class A notes are supported by 30.46% initial hard credit enhancement, slightly below the 30.6% level in VZOT 2016-1.
The notes are secured by 3.47 million device receivables through 2.82 million accounts, which have an aggregate discounted balance of $2 billion. That is up from 2.68 million devices in the collateral pool for VZOT 2016-1.
The transaction, sponsored by Cellco Partnership (d/b/a Verizon Wiressl), has a two-year revolving period for adding more receivables. It is the second public securitization of device payment-plans (DPP) in the U.S., though other carriers are expected to follow suit. Several already use equipment-lease plans to obtain bank financing.
All of the DPPs in the VZOT pool have 24-month original terms and are serviced by Verizon. The customers have an average FICO score of 709, with 31% of the pool considered subprime. None of the customers in whose contracts are in the pool have less than a year of tenure with the carrier’s service.
The pool allows for new receivables meeting the deal’s requirements to be added to the pool.
Fitch assigned a base case default rate of 4% for the pool. Because of the limited historical performance data of DPPs – a finance tool that Verizon adopted in 2013 – Fitch analyst static default vintages of Verizon’s previous subsidy contract portfolio performance dating back to 2007.
The loss assumption for the DPPs in the 7-12 month band of service has decreased, however, to 12% from 14% from the first VZOT deal. That’s because of a new data set in Verizon’s loss-reporting system that was enhanced to more accurately distribute losses, at a loan-level basis, for multiple-device accounts.
Even though the DPP loans have 24-month terms, Verizon offers customers a 12-month upgrade option. That device payment upgrade risk is mitigated by Verizon ensuring trade-ins are in “good working order,” and also by limiting the upgrade as a promotional tool rather than a contractual right of the borrower. Verizon has the right to terminate the promotional offers at any time, Fitch noted.
The deal's underwriters are Bank of America Merrill Lynch; Deutsche Bank Securities, RBC Capital Markets and Wells Fargo Securities.