AT&T INC.

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Fitch Rates AT&T Receivables Funding, LLC June 2022 Investment

06/30/2022 | 05:46am EDT

Fitch Ratings has assigned a rating of 'Asf' with a Stable Rating Outlook to AT&T Receivables Funding, LLC's June 2022 investment.

While the June 2022 investment passes Fitch's cashflow analysis at a rating higher than 'Asf', it is constrained by AT&T's current 'BBB+'/'F2'/Stable rating as a counterparty to the transaction and by structural constraints including the lack of a reserve account to provide dedicated liquidity support to the notes.

RATING ACTIONS

Entity / Debt

Rating

AT&T Receivables Funding, LLC June 2022

June 2022

LT

Asf

New Rating

Page

of 1

VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Obligor Default Risk-Solid Collateral Quality: The June 2022 AT&T Receivables Funding, LLC trust asset pool consists of 100% device installment plan agreements that are originated and serviced by AT&T Mobility, 92% of which have been originated to consumers and the remaining 8% to businesses. The static pool is composed of agreements from AT&T's Low and Medium underwriting risk categories, with long weighted average customer tenure. Fitch assigned a base case default rate of 3.5% for the receivables in the pool (not including upgrade risk).

A stress multiple of 2.4x was applied to the consumer portion of the loans at the 'Asf' stress level, reflecting the non-revolving nature of the transaction and the performance history of the program. A stress multiple of 2.7x was applied to the business portion of the loans at the 'Asf' stress level, higher than the consumer loans to reflect differences in originating and servicing handset contracts to business customers and Fitch's expectations of a greater impact to performance during an economic downturn.

Counterparty Risks-Exposure to AT&T Performance: While not directly linked, the rating assigned to the investments faces greater exposure than other consumer loan transactions to the credit profile and market position of AT&T (BBB+/F2/Stable), the subsidiaries of which act as originators, servicer and network operator. In Fitch's view, customers may change their payment behavior in the event of an AT&T insolvency.

Fitch gives credit to installment payments both before and after a customer's upgrade eligibility. Following an AT&T insolvency there is a risk that upgraded contract remittances may not be made to the trust. To account for this risk, Fitch assumed a 1.00% base case loss. After applying the 2.40x and 2.70x default multiples at the 'Asf' level for consumer and business receivables eligible for upgrades, respectively, the additional loss uplifts were 1.29% and 1.52%, respectively. Fitch also utilized proxy mobile phone upgrade information to better size this risk.

Structural Risks-Robust Credit Enhancement: The transaction will benefit at closing from 31.68% credit enhancement (CE), provided solely through overcollateralization. In addition, while the assets will bear a fixed rate through a 3.95% discount rate, the liabilities will bear a floating rate index to Term SOFR with a Term SOFR cap provided by Banco Santander, S.A. (A-/F2/Stable). This cap will be calculated through a fixed notional amortization schedule, which was modeled by Fitch in its analysis.

Servicer, Operational Risks-Strong Servicing Capabilities: New Cingular Wireless PCS, LLC D/B/A AT&T Mobility, as servicer of the pool, has an extensive history of servicing cell phone contracts. Fitch considers AT&T's servicing operations of cell phone contracts a strength because of this history and AT&T's position as one of the largest wireless service providers in the U.S.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Unanticipated increases in the frequency of defaults or chargeoffs 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 chargeoff assumption by an additional 10%, 25% and 50% and by examining the rating implications. The increases of the base case chargeoffs 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 chargeoff assumptions. Fitch models cash flows with the revised chargeoff estimates while holding constant all other modeling assumptions.

Under the 10%, 25%, and 50% stresses, the rating would remain at 'Asf'.

Additionally, Fitch tested the transaction's sensitivity to the coupon rate on the bonds stepping up due to an early amortization event after six months and at day one. Under both of these stresses the rating would remain at 'Asf'.

While the rating assigned to the June 2022 investment is not directly linked to AT&T's rating, it may be sensitive to a change in AT&T's credit profile if such change is deemed to materially affect the ability of AT&T to fulfill certain counterparty responsibilities.

Fitch has revised its global economic outlook forecasts as a result of the war in Ukraine and related economic sanctions. Downside risks have increased and, therefore, Fitch has published an assessment of the potential rating and asset performance impact of a plausible, albeit worse than expected, adverse stagflation scenario on Fitch's major structured finance and covered bond subsectors (see the report 'What a Stagflation Scenario Would Mean for Global Structured Finance' on FitchRatings.com).

Fitch expects the North American mobile handset sector in the assumed scenario to experience 'Virtually No Impact' on ratings performance, indicating very few (less than 5%) Outlook changes. Fitch expects 'Virtually No Impact' on asset performance, indicating asset performance to remain broadly unaffected, and less than a 10% likelihood of sector outlook revision by YE 2023. Fitch expects the asset performance impact of the adverse case scenario to be more modest than the scenarios above increasing in the default base case by 25%.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Given counterparty considerations, the rating is constrained by AT&T's current 'BBB+'/'F2'/Stable rating. The constraints include the lack of a reserve account to provide liquidity support. An upgrade of AT&T's rating to 'A'/'F1' would increase positive rating pressure.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering Documents for this market sector typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the trust. Therefore, Fitch credit reports for this market sector will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire

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Financials (USD)
Sales 2022 126 B - -
Net income 2022 17 297 M - -
Net Debt 2022 129 B - -
P/E ratio 2022 7,77x
Yield 2022 6,12%
Capitalization 130 B 130 B -
EV / Sales 2022 2,06x
EV / Sales 2023 2,06x
Nbr of Employees 203 000
Free-Float 93,4%
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Number of Analysts 30
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John T. Stankey Chief Executive Officer & Director
Pascal Desroches Chief Financial Officer & Senior Executive VP
William E. Kennard Independent Chairman
Jeremy Alan Legg Chief Technology Officer
Jeffrey Scott McElfresh Chief Operating Officer
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