Taking a page from Sprint’s playbook, Verizon has reportedly initiated a transaction to raise $1.17 billion through a bond backed by its cell phone contracts.
According to a Tuesday report from Reuters, Verizon has hired Bank of America Merril Lynch, Barclays and MUFG to manage the deal. Bank of America reportedly led the structuring of the deal, the report said.
The Financial Times on Tuesday reported the bond will include three tranches of contracts, with the first tranche of $1 billion rated triple A, a second tranche of $84.5 million rated double A and the final tranche of $84.5 million rated single A. Total assets add up to about $1.43 billion for the $1.17 billion bond, the report said.
The bonds would be the first of their kind sold publicly to U.S. investors, the Financial Times said.
The deal will provide Verizon with a way to finance the upfront payments for devices on its equipment installment plans (EIP). Pushed heavily by carriers like Verizon, the EIP option allows customers to pay off their device via monthly payments, but requires carriers to pay for the devices at the outset.
Last month, Moody’s analysts warned the proliferation of EIP plans meant the four major U.S. carriers could be left holding the bill for $55 billion in outstanding consumer loans. According to Moody’s, Verizon alone was facing a working capital deficit that could “double to about $25 billion.”
Verizon was not unaware of this.
At an investor conference earlier this month, Verizon CFO Fran Shammo said the carrier had been looking for over a year for a way to finance EIP handsets.
“One of the things that we’ve been looking at is what if we convert it to the asset-backed security market, which is a public market, and also using banks to be an on balance sheet would be more like the ABS-type instrument,” Shammo said at the time.
According to Shammo’s comments at the conference, the asset-backed strategy benefits Verizon’s ratings from a debt perspective because the deal will not be added to the company’s unsecured debt. Instead, the financing will be treated as a separate pool of funds, “short-term asset-backed security debt similar to the auto industry and so forth,” he said.
Over the course of the next year, Shammo said at the conference, Verizon will be moving into a “full-fledged asset-backed security model,” during which time the carrier’s cash flow figures will evolve and finally equalize.
Shammo said Verizon conducted roadshows with investors who would buy the asset-backed security and expressed confidence at the conference that “there’s demand out there (in the market) for this,” especially given the high-quality of Verizon’s user base.
At the conference, Shammo said the receivables involved in any such transaction would strictly be “consumer EIP-type receivables, the 24-month-type receivables.”
Though positioned as a public offering, the transaction echoes similar private deals conducted in recent months by fellow U.S. carrier, Sprint.
In November, Sprint signed a $1.2 billion lease-back deal with a handset-leasing company set up by its parent company, SoftBank. A second, $1.1 billion lease-back deal followed in April.
Sprint, though has taken things a step further, setting up an additional lease-back deal using its network assets as collateral. Sprint CFO Tarek Robbiati said the carrier is also gearing up for a spectrum lease-back deal.
