Verizon Plans $1.2 Billion in Bonds Backed by Phone Contracts
29 June 2016 - 9:20AM
Dow Jones News
Verizon Communications Inc. is calling on the bond market to
help finance its customers' smartphones.
The wireless carrier is planning to sell around $1.2 billion in
bonds backed by the contracts of around 2.5 million people across
the country who recently bought new iPhones and other phones to use
with Verizon plans. The monthly payments people make on their
phones would be used to pay interest and principal to buyers of the
securities, most of which are expected to be rated triple-A by
Fitch Ratings, which released a presale report on the transaction
Tuesday.
Verizon has yet to price the new securities, so their interest
rate isn't known. The deal is expected to hit the market in the
third quarter.
Verizon has previously securitized its handset receivables with
banks in private transactions. The current offering marks the first
time these types of bonds are being marketed broadly to investors.
The company's hope is that the move will raise low-cost financing
without hurting Verizon's investment-grade credit rating, because
the debt would effectively be off the company's balance sheet.
The approach is borrowed from the auto industry, where financing
companies for years have bundled auto loans into bonds. The
wireless industry's model is shifting in that direction as phones
get more expensive and financing plans proliferate.
"This is new for the industry," Verizon Chief Financial Officer
Fran Shammo said at a conference last month. "The auto industry has
been in this market for years, so this is a pretty steady
market."
In the past, wireless carriers would subsidize the price of the
phones for customers who signed two-year service contracts. Now,
most cellphone plans have cheaper monthly service, but require
customers to cover the full cost of their device, which regularly
runs to $600 or more. Buyers typically pay for them in
interest-free installments over 24 months. After the phone is paid
off, the monthly bill drops.
Verizon is securitizing just the 24-month device payments, not
the monthly service charge.
The new securities are backed by contracts that have an
outstanding balance of $1.5 billion, according to data from Fitch.
Close to a third of borrowers that took out these installment plans
have subprime credit scores, and Fitch projects that in a
worst-case scenario, up to 40% of the pool could become subprime.
Still, the ratings firm expects defaults to be under 5% of the
loans even in a severe scenario.
Verizon has more than 110 million subscribers, making it the
largest U.S. cellphone company.
Write to Ryan Knutson at ryan.knutson@wsj.com and Serena Ng at
serena.ng@wsj.com
(END) Dow Jones Newswires
June 28, 2016 19:05 ET (23:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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