Verizon (NYSE: VZ) is reportedly looking to raise $1.17 billion in a bond backed by customers' monthly phone installment payments in an unprecedented move that may see other mobile network operators follow suit.
Reuters reported that Bank of America Merrill Lynch, Barclays and MUFG have been hired to lead the inaugural transaction, which is said to be the first of its kind among U.S. carriers. An "investor road show" is scheduled to be held over the next two weeks, according to reports, in an effort to sell the bond.
Equipment installment plans (EIPs) have gained favor among both U.S. carriers and consumers as the industry moves away from subsidized handsets and two-year contracts in favor of more transparent models. But the trend is costly in the short term for carriers because they pay the cost of the handset upfront and must wait for customers to pay off their devices in monthly installments.
EIPs also carry some obvious risks for operators. Indeed, Moody's said earlier this year that the four major U.S. carriers could rack up $55 billion in outstanding EIP loans. And Wells Fargo reported in March that T-Mobile was forced to implement new credit policies after bad debt from consumer credit standards took a toll on the bottom line.
Carriers have conducted similar transactions in the past with banks through private transactions, The Financial Times reported, but this will be the first such bonds sold publicly to investors in the U.S. Similar deals have occurred in Japan, the Times said.
Verizon CFO Fran Shammo hinted earlier this month that the carrier would pursue some way to better finance its EIP program. "We've been looking at for over a year now to, really looking at ways to finance the handsets," Shammo said during an investors conference three weeks ago. "Because I don't want to be in the financing business."
The Times reported that the bond will comprise three layers: A $1 billion triple-AAA tier, an $84.5 million double-AA tier and a single-AA tier also at $84.5 million. Investors in the highest-rated tranche are protected from the first 30.6 percent of losses on the EIP loans; the lowest tranche is protected from the first 18.7 percent of losses "due to the underlying assets of the bond exceeding the value sold to investors."
Sprint (NYSE: S) last year said it received $1.1 billion in cash from a handset-leasing company that was established by parent company SoftBank and other investors in an effort to take the financing of leased devices off Sprint's balance sheet and provide it with more liquidity. Sprint has since executed a second deal with the handset-leasing company and has also established a lease-back arrangement for some of its network assets.
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