Rating Action: Moody's assigns provisional ratings to Verizon Owner Trust 2020-B Notes
Global Credit Research - 30 Jul 2020
Approximately $954 million of asset-backed securities rated
New York, July 30, 2020 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to the notes to be issued by Verizon Owner Trust 2020-B (VZOT 2020-B), the second device payment plan agreement transaction issued from the VZOT platform this year and twelfth overall. The notes will be backed by a revolving pool of device payment plans that are consumer installment loans used to finance the purchase of mobile devices. All receivables are originated by Cellco Partnership d/b/a Verizon Wireless, a wholly owned subsidiary of Verizon Communications Inc. (Verizon) and certain other affiliates of Verizon. Cellco Partnership d/b/a Verizon Wireless will also be the servicer of the transaction.
The complete rating actions are as follows:
Issuer: Verizon Owner Trust 2020-B
Class A-1a Notes, Assigned (P)Aaa (sf)
Class A-1b Notes, Assigned (P)Aaa (sf)
Class B Notes, Assigned (P)Aa1 (sf)
Class C Notes, Assigned (P)Aa3 (sf)
The ratings are based on the underlying collateral and its expected performance, the transaction structure, the fast amortization of the collateral after a two-year revolving period, and the strong default mitigation servicing practices.
Moody's cumulative net loss expectation for the VZOT 2020-B pool is 4.75% and the collateral loss at a Aaa stress is 23% in cases in which the transaction satisfies the Floor Credit Enhancement limits. Moody's cumulative net loss expectation for 2020-B is 5.25% and the collateral loss at a Aaa stress is 25% in cases the pool satisfies the Pool Composition limits. The net loss expectation and loss at a Aaa stress in both cases are 0.25% and 1.00% higher than those of VZOT 2020-A respectively, the last transaction Moody's rated. Moody's based its cumulative net loss expectations and Aaa stress on factors including historical loss performance of obligors, servicer quality, linkage to carrier, initial pool characteristics, and potential pool quality deterioration towards the transaction's concentration limits, and other structural features.
The rapid spread of the COVID-19 outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of consumer assets from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. Specifically, for US device payment plan backed ABS, performance will weaken due to the unprecedented spike in the unemployment rate, which may limit borrowers' income and their ability to service debt. Furthermore, borrower assistance programs to affected borrowers, such as payment deferrals, may adversely impact scheduled cash flows to bondholders. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the COVID-19 outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Due to revolving feature of this transaction and a remote possibility of an imminent amortization, we expect the COVID-19 impact on this transaction to be minimal.
At closing the Class A notes, Class B notes, and Class C notes are expected to benefit from 21.25%, 15.75%, and 11.50%, of hard credit enhancement, respectively. Hard credit enhancement for the notes consists of a combination of over-collateralization, a non-declining reserve account and subordination, except for the Class C notes which do not benefit from subordination. The notes will also benefit from excess spread.
The principal methodology used in these ratings was "Moody's Approach to Rating Consumer Loan-Backed ABS" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230138. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Moody's could upgrade the notes if, given current expectations of portfolio losses, levels of credit enhancement are consistent with higher ratings. In sequential pay structures, such as the one in this transaction, credit enhancement grows as a percentage of the collateral balance as collections pay down senior notes. Moody's expectation of pool losses could decline as a result of better than expected improvements in the economy, changes to servicing practices that enhance collections or upgrades or that result in prepayments. Given the linkage to the carrier, ratings of the subordinate notes could also be upgraded if the rating of Verizon were to be upgraded.
Moody's could downgrade the ratings of the notes if pool losses exceed its expectations and levels of credit enhancement are consistent with lower ratings. Credit enhancement could decline if excess spread is not sufficient to cover losses in a given month. Moody's expectation of pool losses may increase, for example, due to performance deterioration stemming from a downturn in the US economy, deficient servicing, errors on the part of transaction parties, inadequate transaction governance or fraud. In addition, given the linkage to the carrier, ratings of the notes could also come under pressure if the rating of Verizon were to be downgraded.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1239600.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Ruoheng Liu Vice President - Senior Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 JingJing Dang, CFA Associate Managing Director Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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