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 percent of the pool could become subprime. Still, the ratings firm expects defaults to be under 5 percent of the loans even in a severe scenario.
Verizon has more than 110 million subscribers, making it the largest U.S. cellphone company.
