Verizon Wireless has a unique way of scoring cell phone customers that weeds out the very worst credits - the "never pays" - allowing it to finance contracts with a wider range of credit scores in the securitization market.
As a result, the carrier’s latest offering, the $1.96 billion Verizon Owner Trust 2017-1, is able to add a significant segment of higher-risk customers without impacting the overall credit quality of the pool of handset receivables financing.
According to a presale report published by Fitch on Friday, VZOT 2017-1 has a slightly higher percentage of short-tenured and low-FICO customers in its initial statistical pool of $1.96 billion in aggregate principal balance, compared to those launched in its two prior bond offerings backed by device-payment plan (DPP) receivables.
The report notes that DPP agreements to customers with less than seven months of service with Verizon - those that have produced higher loss rates in Verizon's managed portfolio of DPPs - make up 16.01% of the statistical pool. That compares to 15.41% and 13.98% initial stat pool levels for new customers included in VZOT 2016-1 and 2016-2, respectively, for the first two transactions conducted on the carrier’s new platform last year.
Fitch chose to increase the base case default rate for that band of customers by 0.5% to 8.5% from the initial statistical pools of Verizon’s 2016 transactions that were at 8% apiece. That results in only a slight nudge of the overall pool’s base-case default rate to 4.1%, from the 4% default projection for 2016-1 and 2016-2.
Also coming in higher than the previous deals’ initial pools was the percentage of customers with lower FICO scores. The 15.95% of DPP receivables tied to consumers with a FICO range of 250-599 was higher than the initial 14.96% (2016-1) and 14.45% (2016-2).
About 32% of the contracts in the pool are considered subprime. But the carrier’s latest offering is still backed by mostly prime-level contracts with a weighted average FICO of 706, which is in line with the FICO average of 708 (2016-1) and 709 (2016-2).
The credit enhancement in the deal is only slightly higher. The senior $1.1 billion tranche of Class A notes, provisionally rated AAA by Fitch Ratings, benefit from 30.71% credit enhancement, up 25 basis points from 30.46% for the comparable tranche of the prior transaction, 2016-2 transaction (also ‘AAA’ rated).
There is also a $94 million tranche of four-year Class B notes (rated AA) and a $94 million tranche of four-year Class C notes (rated A).
Verizon itself carries an investment-grade rating from Fitch (A-/Stable) Moody’s Investors Service (Baa1/Stable) and Standard & Poor’s (BBB+). Because bonds backed by handset financing are sensitive to the ratings of their sponsors, a multiple-notch downgrade of Verizon would like result in a downgrade of senior notes below AAA.
Fitch must take Verizon’s corporate ratings into account because an insolvency or network interruption could negatively impact customers’ willingness to pay monthly bills on devices without an available network.
To date, Verizon is the lone U.S. carrier to publicly issued asset-backed notes as a means of financing customer device purchases. Sprint has previously announced plans to do so, but its lone foray into the market is securitizing spectrum licenses.
EDITOR’S NOTE: The original version of this article overstated the credit risk of the initial statistical pool of VZOT 2017-1, creating an inaccurate comparison with earlier transactions.