Asset backed securities, issued by banks and sold by private parties in most cases, are normally backed by something either tangible or legally binding, such an annuity payment, mortgage or even a vehicle or business. While mobile contracts technically fall into these criterion, their use in the ABS market is unheard of in the United States, mainly due to the uncertainty of the wireless market. Not only do carriers’ balance sheets rise and fall, but there is always the chance that a customer, if given sufficient reason, will simply jump ship from a contract, opting to pay the early termination fee to buy themselves out or in some cases just deciding to take the credit hit. Despite all of this, it seems that Verizon has drummed up enough trust within the finance industry to recruit a few banks to help them get securities backed by cell phone contracts out the door for the first time in US history.
The benefit to Verizon here is that they can get some extra cash in their pockets and issue loans based on these securities, which could turn into a large payday for them upon maturation. Although Verizon will be getting banks on board to help back the securities to investors and to sell and issue them, Verizon will play the role of “junior” in the transactions, while the banks will be “seniors”. This simply means that, should everything fall through for whatever reason, Verizon would have to be drained absolutely dry for the banks to be liable for a single cent, despite their names being on the contracts. Given Verizon’s deep pockets and large number of long-term subscribers, the involvement of the banks is largely a formality, but a necessary one to get into the market.
The initial transaction will be valued at about $1.169 billion and is projected to be rated triple-A by rating authorities. Verizon has, however, personally hired Fitch Ratings and S&P Global Ratings, two of the biggest in the business, to check out the deals and ensure they’re up to snuff before execution. The banks on hand are set to be Bank of America, who is currently restructuring under Merrill Lynch, along with Barclays and Mitsubishi UFJ Financial Group. Investor road shows will be putting the goods on display for the next few weeks, after which Verizon is expected to jump feet-first into the ABS market.