Why Verizon Is Selling Smartphone Payment-Backed Bonds

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Verizon (NYSE:VZ), the largest U.S. wireless carrier, is planning to sell the first public debt offering backed by smartphone equipment installment plan (EIP) payments during Q3 2016, in a move that could expand its capital sources while reducing financing costs. The approximately $1.2 billion worth of bonds will be backed by EIP payments from close to 2.5 million of the carrier’s subscribers. [1]  Below, we take a look at the rationale behind the move and the potential benefits for Verizon.

We have a price estimate of $55 for Verizon’s stock, which is roughly in line with the current market price.

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The major U.S. carriers have largely migrated to equipment installment plans for handset sales, as it enables them to cut subsidy expenses, while giving customers greater flexibility with their device purchases. However, these plans have been putting pressure on carriers’ liquidity and working capital, since they allow subscribers to finance the entire retail price of a smartphone over a period (typically 24 months) without having to pay any interest (although this is likely factored into service billings). By securitizing these EIP receivable assets and effectively taking them off its balance sheet, Verizon can free up liquidity to deploy into other areas of its business. Verizon had about $2.7 billion in device installment plan receivables, classified under accounts receivables ($1.66 billion) and other assets ($1.03 billion), as of March 31. [2] 

While the yield on the securities is not known since Verizon has yet to provide pricing data, it’s likely to be fairly low for multiple reasons.  Firstly, the payments will be made by Verizon’s postpaid phone customers, who are among the most loyal and creditworthy in the industry, reducing risks of default. Additionally, wireless services are viewed as a necessity, implying that customers are less likely to stop paying their wireless bills during economic downturns. Fitch Ratings, which released a pre-sale report earlier this week, expected most securities in the issue to receive a triple-A rating. [3] While Verizon has been securitizing and selling some EIP assets to big banks, the carrier expects to pay comparatively lower interest rate on the securities sold to the public.

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Notes:
  1. Verizon Plans $1.2 Billion in Bonds Backed by Phone Contracts, WSJ, June 2016 []
  2. Verizon Form 10-Q []
  3. Fixed Income, Verizon Investor Relations []