NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned ratings and Rating Outlooks to the following Verizon Owner Trust 2016-2 (VZOT 2016-2) notes:
--$1,200,000,000 class A 'AAAsf'; Outlook Stable;
--$100,000,000 class B 'AAsf'; Outlook Stable;
--$100,000,000 class C 'Asf'; Outlook Stable.
KEY RATING DRIVERS
Receivable Quality: The VZOT 2016-2 trust pool consists of 100% DPPs with 24-month original terms that are originated and serviced by subsidiaries of Verizon Communications Inc. The final pool exhibits a weighted average FICO score of 712 and a weighted average remaining term of 24 months. Of the statistical pool, Fitch considers 29% to be subprime, and as part of the worst case pool, this can grow to more than 40%. New receivables meeting the eligibility requirements will be purchased into the trust for two years or until an amortization event occurs.
Fitch assigned a base case default rate of 3.6% for the current pool and 4.5% and 5.0% for the two worst case portfolios it analyzed. Fitch applied a stress multiple of 6.0x at the 'AAAsf' stress level, reflecting mainly the two-year revolving period; the use of proxy data as limited data history was available for the DPPs; and the view that customer payment behavior on the DPPs could be negatively affected by a Verizon insolvency.
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. (currently rated 'A-'/'F2'/Stable Outlook), whose subsidiaries act as originators, the servicer and network operator.
In Fitch's view, this can take the form of (1) indirect exposure through customers changing their payment behavior in the event of a Verizon insolvency and (2) 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 Communications Inc. could affect Fitch's ratings on the notes. While a limited downgrade of Verizon is unlikely to result in a downgrade of the senior notes, a multi-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 (1) the strengths of Verizon's network, (2) a reduced revolving period, (3) lower than assumed direct exposure through the upgrade program (also considering the additional credit enhancement [CE] to cover any such risk, which is 6% at closing) and (4) 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 2016-2 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 to its peers.
Due to the importance of the delinquency trigger in the transaction's structure, Fitch distinctively modelled 61+ day delinquencies, rather than solely the assets that ultimately default. Use of such criteria variation impacts the ratings by at most one notch, and only in certain modelling scenarios.
Unanticipated increases in the frequency of defaults or charge-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.
Fitch conducts sensitivity analysis by stressing a transaction's initial base case charge-off assumption by an additional 25% and additional 50%, and examining the rating implications. The increases of the base case charge-offs are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of a transaction's performance.
During the sensitivity analysis, Fitch examines the magnitude of the multiplier compression by projecting the expected cash flows and loss coverage levels over the life of investments under higher than the initial base case charge-off assumptions. Fitch models cash flows with the revised charge-off estimates while holding constant all other modelling assumptions.
Under the 25% stress, the senior notes would likely be downgraded, while remaining high investment grade. The ratings on the class B would fall to 'Asf' and the C notes would migrate to 'A-sf'. Under the 50% stress, the class A would be downgraded to 'Asf', while the subordinate notes would both fall to 'A-sf.'
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with third-party due diligence information from Ernst & Young LLP. The third-party due diligence focused on comparing certain information with respect to 1,100 loans from the statistical data file. Fitch considered this information in its analysis, and the findings did not have an impact on our 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 (RAC).
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)
Global Consumer ABS Rating Criteria (pub. 19 Aug 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Verizon Owner Trust 2016-2 -- Appendix
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
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