Fitch Rates Verizon Owner Trust 2016-1

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns ratings and Rating Outlooks to Verizon Owner Trust 2016-1 (VZOT 2016-1) notes as follows:

--$1,000,000,000 class A 'AAAsf'; Outlook Stable;

--$84,520,000 class B 'AAsf'; Outlook Stable;

--$84,510,000 class C 'Asf'; Outlook Stable.

KEY RATING DRIVERS

Receivable Quality: The VZOT 2016-1 trust pool consists of 100% device payment plan agreements (DPPs) with 24-month original terms that are originated and serviced by subsidiaries of Verizon Communications Inc. The statistical pool exhibits a weighted average FICO score of 708 and a weighted average remaining term of 22 months. Of the statistical pool, Fitch considers 31% to be sub-prime, and as part of the worst-case pool this can grow to more than 40%. New receivables meeting the eligibility requirements will be purchased for the trust for two years, or until an amortization event occurs.

Fitch assigned a base case default rate of 4.0% for the statistical pool and 4.6% and 5.2% 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 impacted 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. (Verizon; rated 'A-'/'F2'/Outlook Stable by Fitch), whose subsidiaries act as originators, 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 that reason, a downgrade of Verizon could impact 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 multi-notch downgrade - particularly to sub-investment 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, which could lessen the rating impact in the future.

Strong Servicing Capabilities: Cellco Partnership, as servicer of the VZOT 2016-1 pool receivables, has a long track record of servicing consumer cell phone contracts. Due to this and Verizon's position as the largest wireless service provider in the United States, Fitch considers Verizon's servicing operations of cell phone contracts to be a strength compared to its peers.

RATING SENSITIVITIES

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 by 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 and C notes migrate to 'Asf' and 'A-sf', respectively. Under the 50% stress, the class A notes would fall to 'Asf', with the class B and C notes one notch lower.

CRITERIA VARIATION

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.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch's analysis of the Representations and Warranties (R&W) of this transaction can be found in 'Verizon Owner Trust 2016-1 Appendix'. These R&Ws are compared to those of typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated May 2016.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815

Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875586

Global Consumer ABS Rating Criteria (pub. 03 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874105

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130

Related Research

Verizon Owner Trust 2016-1 - Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884204

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009203

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009203

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160720006490/en/

Fitch Ratings
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Eric Orenstein
Analyst
+1-646-582-4816
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Harry Kohl
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+1-212-908-0837
or
Committee Chairperson
Andreas Wilgen
Managing Director
+44-203-530-1171
or
Media Relations
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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