Verizon Weighs Selling Bonds Backed by Customers’ Phone Payments

  • No. 1 carrier has $110 billion in debt and dividend obligation
  • Move could create asset-backed market for phone payments

Verizon Communications Inc., the largest U.S. wireless provider, may sell bonds backed by the payments its customers owe for financing phones.

While other companies such as Sprint Corp. have used the technique to obtain private loans, Verizon would be one of the first wireless carriers to issue bonds that use expected monthly phone payments from its customers as collateral. The company is looking into the option because U.S. banks have limited capacity to purchase such payments, Chief Financial Officer Fran Shammo said at an investor conference Tuesday.

There’s a “lower cost of capital” in this market, Shammo said. Verizon has talked to credit rating companies about the idea and expects to announce next steps in the first half of the year, he said.

Verizon, the nation’s largest wireless carrier, has been looking to reduce debt and free up cash as the wireless market matures and competition increases. The infusion of cash borrowed against phone payments would help ease the company’s $110 billion debt burden ahead of a federal auction of airwaves this spring, at which Verizon is expected to bid $6.2 billion, according to a Bloomberg survey of analysts in January.

“There are a few things pulling in different directions at Verizon,” said Mike McCormack, an analyst at Jefferies LLC.

Over the last few years, the industry has moved more customers to plans where they pay for their phones in installments, instead of including the phone as part of the service contract. The carriers have amassed about $40 billion worth of outstanding payments, McCormack said. That’s an asset they can use to secure funding. AT&T, the No. 2 carrier, sold $4.4 billion worth of phone-payment receivables to bondholders last year. But instead of selling its phone payments, Verizon wants to borrow against them.

No Market Yet

“The other carriers don’t do this yet simply because the asset-backed security market for handsets is not yet established,” said Kevin Roe, of Roe Equity Research LLC. Once there’s a market, more will participate, he said.

In November, Sprint Corp. took $1.2 billion in financing from a phone leasing company created by majority owner SoftBank Group Corp. to help lower equipment costs and relieve pressure on the unprofitable carrier’s dwindling cash supply.

One potential drawback to these financing plans is the creditworthiness of customers, McCormack said.

“It’s a big sum of money, and the recourse -- if there’s a problem -- goes back to the carrier,” McCormack said.

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