Legacy Thread

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Wall Street’s newest alchemy: Bundling people’s cellphone bills into bonds

Verizon’s $1.2 billion bond backed by customer payments

By Andrea Riquier
Sept 20, 2016 9:54 a.m. ET


Loan payments to Verizon are whizzing by to bond investors.

Mortgages. Car loans. Even credit cards.

The many consumer loan products Wall Street has “securitized” — packaged up, sliced and diced, and sold to investors — have had their ups and downs over the years.

Now add to that list mobile-phone payments.

In July, Verizon became the first company to sell a bond deal backed by monthly mobile phone payments. Wireless carriers have created such deals before, but have only sold them within bank markets. Verizon’s $1.2 billion sale into a broader marketplace was the first step into what many analysts believe could explode into a multi-billion dollar market within the next year.

The embrace of securitizations follows another big transformation in the mobile phone industry. For years, customers would receive new devices in exchange for signing on for a two-year contract. But since 2013, big carriers have been shifting customers into loan agreements that allow them to pay for new phones over time.

The new type of plan is often known as equipment installment plans. They offer customers more flexibility to upgrade devices and somewhat lower fees for wireless service, “potentially bolstering consumer perception of a carrier’s service plans,” Moody’s Investors Service analysts wrote in a note.

But for carriers, they create large working-capital shortfalls that have to be filled either through traditional debt, equity, or a securitization, Moody’s wrote in a separate note.

Moody’s said that mobile phone contracts have a particular strength as an asset, “owing to the fact that they represent an essential component of Americans’ daily lives and routines.” But it also wrote that the new contracts have not yet “been tested in a difficult economic environment.”

Verizon’s deal included more than 3 million receivables representing average monthly payments of about $28. The average FICO score of the subscribers included in the deal was 708, higher than the national average of 695.

The deal was “heavily oversubscribed,” Standard & Poor’s wrote in an August report, “which is supportive of future volume.” S&P estimates there are about $35 billion to $40 billion of underlying mobile device loans in the U.S., “and likely growing.” Moody’s estimates the four major carriers could have as much as $55 billion in outstanding consumer loans.

Brad Friedlander, head portfolio manager at Angel Oak Capital Advisors, was not a buyer. The deal, which yielded 55 basis points more than its benchmark for the Triple-A tranche, according to industry publication Asset-Backed Alert, wasn’t appealing enough, he told MarketWatch. “Issuers are winning out here,” he said.

Still, Friedlander said, “it’s nice to see innovative new offerings, especially those coming from a growing segment of the market.” Consumers are one of the few bright spots in the economy, he said, and while it’s possible that future mobile phone securitizations will feature subscribers further down the credit spectrum, he thinks issuers may find credit enhancements to make that more palatable to ratings agencies and investors.

In late July, just after the Verizon deal completed, the CFO of Sprint S, +0.64% sounded ready to jump on the bandwagon, talking of “tapping into the securitization market as Verizon just did. This is a natural evolution for every player in the industry,” Tarek Robbiati said on an earnings call.

Securitizations like these will help carriers diversify their funding sources, making their balance sheets look a little better than if they simply issued more debt. Debt based on what Joseph Lau, a managing director with RBC Capital Markets, calls “high-quality consumer borrowers” is likely to trade as well or better than corporate debt over time, he noted.

The Verizon deal has been very liquid in secondary market trading, Lau said, and “investors continue to call and ask about the next deal.”

http://www.marketwatch.com/story/wall-streets-new-raw-material-for-bonds-is-your-phone-bill-2016-09-19