Verizon likely blazing a trail for ABS funding, Barclays says

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Verizon’s move to raise money backed by customers’ monthly phone installment plans may prompt other carriers to follow suit, according to Barclays. And that could whet the appetites of investors for the new accounting scheme.

The nation’s largest mobile network operator last month became the first U.S. carrier to issue a bond backed by mobile device payment plans. The $1.2 billion offering “was met with widespread investor interest,” Barclays said, and continues to trade favorably compared to other ABS (asset-backed security) offerings.

“Given the success of (Verizon’s bond), we expect Verizon to regularly finance device payment plan receivables through the ABS market and foresee the other major carriers – AT&T, Sprint and T-Mobile – eventually following suit,” Barclays wrote recently in a research note. “In the past few years, mobile carriers have shifted away from subsidizing customer phone purchases and now primarily offer financing options, such as installment plans or leasing options. Our fundamental research analysts estimate that device payment plan receivables could grow from approximately $33 billion at the end of 2Q to approximately $46 billion over the next few years as mobile carriers continue to use financing contracts in the majority of their new phone activations.”

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Indeed, the industry-wide move away from subsidized handsets and two-year contracts toward equipment installment plans (EIPs) has been difficult for carriers. Consumers are holding on to their handsets longer, resulting in declining sales of new phones, and service providers are experimenting with various financing models to pay for handsets in full while consumers move to monthly installment plans. And EIPs carry the added risk of bad debt from consumers who don’t follow through on their monthly payments, as T-Mobile learned last year.

The ABS model enables carriers to keep receivables on their balance sheets, Barclays explained, “and the corresponding cash inflow is reported as a financing cash flow, versus an operating cash flow, offset by the addition of debt to the balance sheet. The result is that operating cash flow decreases, ultimately lowering reported free cash flow, while the effect on total cash flow is neutral.”

The ABS model may not be appropriate for every network operator, Barclays said, but Verizon’s success may pave the way for some other carriers struggling to cope with the costs of EIPs.

“While we acknowledge that most carriers are not likely in a position where ABS financing is necessary (potentially as a result of reaching bank limits on factoring, for example), our checks suggest that all of the carriers may take a closer look at the option following Verizon’s foray into the market, which should also help to broaden investors’ appetite for this type of financing,” the firm wrote.

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