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Fitch: European Mobile Handset ABS Can Grow, but Will Lag the US
May 18, 2017 / 11:53 AM / 6 months ago

Fitch: European Mobile Handset ABS Can Grow, but Will Lag the US

(The following statement was released by the rating agency) LONDON, May 18 (Fitch) Changing mobile phone contract structures mean public securitisations of equipment instalment plans (EIP) may emerge in Europe in the next 12-18 months, but the size of the market will probably be smaller than in the US, Fitch Ratings says. Carriers are shifting away from offering customers a bundled service plan and subsidised handset towards EIPs in response to customer preference and competition. Under an EIP, customers repay the full cost of handsets effectively through a 0% loan contract. These new and separate contracts between carrier and customer create a distinct receivable, which can - as demonstrated in the US - be pooled and refinanced via a securitisation. Three deals in the US backed by payment plans originated by subsidiaries of Verizon have been publicly placed with investors (Fitch rated the highest-ranking notes 'AAAsf' in all three deals). No public deals have taken place in Europe, although Fitch understands there has been at least one private transaction, and ABCP conduits have been buying handset receivables for some time. This suggests there is scope for European public issuance, although there are impediments to large deals. For example, the mobile phone market is more fragmented than in the US, and remains largely country specific. Cross-border consolidation has been limited despite efforts at regulatory harmonisation, and even the largest carriers operate country by country. If investors prefer single-jurisdiction deals, as is typically the case with other consumer asset classes, carriers would have to create multiple securitisation platforms for their European assets, reducing scale benefits. The number of securitisable accounts per carrier per country will also be lower due to greater competition in the European market (reflected in the lower cost of mobile phone services than in the US). Public transactions might therefore only be expected in the five largest European markets. But this will also depend on country-by-country customer preferences, and the rate of EIP adoption. In Italy, for example, pay-as-you-go contracts are still dominant, potentially limiting the size of carriers' EIP receivables pools, even in a large market for mobile services. EIP contracts have not yet emerged as a uniform product across carriers or even jurisdictions in Europe. Starting in the UK and Spain mobile contracts have begun to outline the costs of the financed receivable explicitly, which could be the first step towards establishing a distinct and assignable receivable. Legal analysis of the status of the handset financing contract component is one feature of our analysis of EIP securitisations. Our asset assumptions may encompass relevant performance data from pre-EIP contracts, as EIP is a relatively new phenomenon and the minimum five years of performance history may not yet be available. We also assess the degree of rating dependence on the seller's credit profile and market position, which was higher in the Verizon transactions than in other consumer loan transactions. This can take the form of indirect exposure, as customers' payment behaviour is very likely to worsen in the event of carrier insolvency if they no longer receive mobile phone services. It can also be more direct, for example if the trust relies on the seller to remit cash payments due to promotional contract features such as upgrade options or recurring credits. The extent of rating dependence will vary according to these features, but we think higher indirect dependence will be a distinguishing feature of the EIP market overall, meaning issues from carriers with low credit ratings and weak market positions would be unlikely to receive the highest investment-grade ratings. Handset receivables securitisations were among the topics discussed at Fitch's recent European Structured Finance Conference in London. Video highlights are available at www.fitchratings.com. <a href="https://www.fitchratings.com/site/re/891069">Global Consumer ABS Rating Criteria Contact: Markus Papenroth Managing Director, Structured Finance +44 20 3530 1707 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Andreas Wilgen Managing Director, Structured Finance +1 212 908 0778 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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