Fitch to Rate Verizon Owner Trust 2018-A; Issues Presale.
--$550,000,000 class A-1a 'AAAsf'; Outlook Stable;
--$550,000,000 class A-1b 'AAAsf'; Outlook Stable;
--$75,800,000 class B 'AAsf'; Outlook Stable;
--$58,600,000 class C 'Asf'; Outlook Stable.
Since its analysis of prior issuance, Fitch has revised key assumptions applicable to the entire Verizon platform, namely the default multiples, the default assumptions and the upgrade loss assumptions.
Default Multiple: Fitch has lowered its default multiples for revolving VZOT transactions to 5x at 'AAAsf' from 6x in prior ratings. Similarly, the 'AAsf' and 'Asf' multiples have been reduced to 4x and 3x, respectively. The shift is driven by increased data availability for the DPP program, observed stability in the characteristics and performance of originations and the strong performance to date of the six outstanding securitizations.
Default Assumptions: Fitch has lowered its default assumptions for DPPs within the 8- to 12-month and 61+ month customer tenure bands, due to actual performance well inside of its prior assumptions. Fitch now assumes base case defaults of 10% for the 8- to 12-month band, compared with 12% previously, and 1.25% for the 61+ month band, compared with 1.50% prior. These changes reduce Fitch's weighted average base case for the Floor CE stressed pool mix to 4.20% from 4.46%.
Upgrade Loss: Fitch has lowered its upgrade loss assumptions to 2.5%, 2% and 1.5% at 'AAAsf', 'AAsf' and 'Asf', respectively, reduced from 5%, 4.5% and 4%. The assumptions were derived by assigning a 0.50% base case, based on actual monthly upgrade take rates, and applying the default multiple at each rating category. The assumption change is due to actual take rates occurring at far lower levels than observed peaks seen in 2013-2014, with customers retaining their devices for longer periods rather than upgrading as frequently.
KEY RATING DRIVERS
Solid Receivable Quality: The VZOT 2018-A pool consists of DPPs with primarily 24-month original terms (plus a small concentration with 6-month original terms) that are originated and serviced by subsidiaries of Verizon Communications Inc. The weighted average FICO score is
706. Of the pool, about 32% have a FICO score below 650 (or no FICO score available), which Fitch would consider 'subprime', and this can grow to more than 40% of the worst case pool, based on revolving composition tests. While Fitch's default assumption for the current pool is 3.6%, it assigned base case default rates of 4.2% and 4.7% for the two worst case portfolios, due to the revolving period. Fitch applied a stress multiple of 5.0x at the 'AAAsf' stress level, reflecting the view that customer payment behavior on the DPPs could be negatively affected by a Verizon insolvency, as well as the potential for performance degradation during the revolving period.
Stable Portfolio Composition and Performance: To date, the portfolio compositions for all outstanding transactions have remained in line with the portfolio compositions at closing, and better than the stressed pool composition considered by Fitch in its analysis. Default performance of the securitizations and overall originations has likewise been stable.
Verizon Rating Dependency: While not directly linked, the ratings of the notes face greater exposure than other consumer loan transactions to the credit profile and market position of Verizon Communications Inc. (A-/F2/Stable), whose subsidiaries act as originators, servicers and network operators. In Fitch's view, this can take the form of indirect exposure through customers changing their payment behavior in the event of a Verizon insolvency and directly through the risk of device payment upgrade contract remittances not being made to the trust following Verizon's insolvency.
For these reasons, a downgrade of Verizon could affect Fitch's credit ratings of the notes. While a limited downgrade of Verizon is unlikely to result in a downgrade of the senior notes, a multiple-notch downgrade -- particularly to speculative grade -- will increase the likelihood of a downgrade of the senior notes below 'AAAsf'. However, there is no automatic credit linkage, as other factors such as the strengths of Verizon's network, a reduced revolving period, lower than assumed direct exposure through the upgrade program (also considering the additional CE to cover any such risk) and the available CE, if already increased during the amortization phase, could lessen the rating impact in the future.
Strong Servicing Capabilities: Cellco Partnership, as servicer of the VZOT 2018-A pool receivables, has a long track record of servicing consumer cell phone contracts. Due to this factor and Verizon's position as the largest wireless service provider in the U.S., Fitch considers Verizon's servicing operations of cell phone contracts to be a strength compared with those of its peers.
Unanticipated increases in the frequency of defaults or write-offs on customer accounts could produce loss levels higher than the base case and would likely result in declines of CE and remaining loss coverage levels available to the investments. Decreased CE may make certain ratings on the investments susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Rating sensitivities provide greater insight into the model-implied sensitivities the transaction faces when one or two risk factors are stressed, while holding others equal. The modeling process first uses the estimation and stress of a base-case loss assumption to reflect asset performance in a stressed environment. Second, structural protection was analyzed with Fitch's proprietary cash flow model. The results below should only be considered as one potential outcome as the transaction is exposed to multiple risk factors that are all dynamic variables.
Expected impact on the note rating of increased defaults (class A-1a&A-1b/ class B/ class C)
Current Ratings: 'AAAsf'/'AAsf'/'Asf'
Increase base case defaults by 10%: 'AA+sf'/'AA-sf'/'A-sf'
Increase base case defaults by 25%: 'AAsf'/'Asf'/'A-sf'
Increase base case defaults by 50%: 'A+sf'/'A-sf'/'BBBsf'
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Additionally, Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by Ernst & Young LLP. The third-party due diligence described in Form 15E focused on a comparison and recalculation of certain characteristics with respect to 3,250 randomly selected statistical receivables. Fitch considered this information in its analysis, and the findings did not have an impact on the analysis. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and that relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es with those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 31, 2016.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 7, 2019|
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