Monday, May 4, 2015

U.S. Mobile Carriers Expectd to Securitize Phone Installment Contracts

“Factoring” long has been a way companies can convert receivables into cash, and it appears the big four U.S. mobile carriers will use a form of factoring--actually securitizing equipment purchase contracts--more widely in the future.

All of the big carriers are likely to use equipment installment contracts as collateral for financing in 2015, Jefferies Group equity analyst Mike McCormack said. “Now there’s a cheap way to free up cash flow and use it as working capital.”

T-Mobile, based in Bellevue, may sell debt backed by customer payments on iPhones and other equipment as a way of reducing its financing costs, as it also has securitized other contracts.

T-Mobile US  weighted cost of capital is about six percent, while securitization of receivables runs about three percent, the company said.

AT&T CFO John Stephens and Verizon Communications CFO Fran Shammo have said they plan to securitize receivables. AT&T seems more specific, saying it will do so in 2015. Verizon simply says it is looking at doing so.

Sprint is likely to do so if the others move.

Jefferies analysts estimated the top four wireless carriers will help finance more than $37 billion in customer purchases throughout 2015. That may create a balance of $29 billion in cumulative receivables that could rise to $40 billion in two years.

So long as the actuarial assumptions are correct, there likely is not a problem. If assumptions about bad debt are off, the securitized loans will have the same sort of problem securitized home loans did recently.

Granted, mobile service providers and their actuarites arguably have a much better handle on account risk than mortgage lenders did. But that is not to say there is no risk.

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