By Joy Wiltermuth
NEW YORK, July 14 (IFR) - Verizon Wireless this week priced the first US rated bond using cellphone contracts as collateral, a milestone issue that may pave the way for a new asset class in the ABS market.
Verizon and peers such as AT&T, T-Mobile and Sprint already sell unrated securitizations of phone payment and lease plans to banks in private deals.
But the runaway success of Verizon's public US$1.169bn trade, which saw order books peak around US$12bn, could open a new and potentially massive avenue of funding.
This looks especially attractive as the companies have to pay upfront for the phones - and then wait it out through months or years of customer payments to recoup that money.
"Clearly they want to get rid of that working capital," said Michael Dimler, a senior credit analyst focused on technology and telecoms at Morningstar.
But he cautioned that the nascent sector would have to prove itself through a credit downturn before it would get mainstream buyside acceptance.
"Everybody thought that nobody was going to default on their mortgages," Dimler said.
CHANGING MODEL
With the move toward a monthly payment plan model in the cellphone industry, the major carriers have huge inventories of contracts ripe for securitization.
Moody's Investors Service said in February that the phone contract sector could potentially grow into an ABS asset class worth tens of billions of dollars.
Verizon has already been securitizing about US$2bn of phone finance plans per quarter through private deals sold to banks, CFO Francis Shammo told an industry conference last month.
But he said the plan was to phase out those trades and replace them with public ABS financing.
Verizon and AT&T are both rated BBB+ by S&P - and with their focus on phone sales and high corporate ratings - would seem to be especially likely candidates to grow the market.
"Verizon could be blazing a trail here," another telecoms analyst said.
According to S&P Global Ratings, the trade was backed by roughly three million cellphone payment plans to borrowers with an average FICO score of 708 and monthly payments of US$28.
Its top US$1bn class of 2.52-year Triple A notes cleared at 55bp over interpolated swaps to yield 1.431%, or 10bp-15bp tighter than guidance, bankers and investors said.
Two 3.22-year classes of Double A and Single A rated notes were retained, according to one banker on the trade.
"I think this deal was a success beyond anyone's expectations," one banker involved in the transaction said.
"I'd be very surprised if other telcos didn't follow suit."