S&P Global Ratings has lowered its expectations for defaults on Diamond Resorts' next offering of bonds backed by timeshare loans, and this has allowed the resorts operator to achieve its first AAA rating.
The transaction, Diamond Resorts Owner Trust 2018-1, will issue four tranches of notes totaling $300 million. The senior tranche, which benefits from 49% credit support, is rated AAA. That compares with an A on Diamond Resorts' previous transaction, completed in 2017, which was rated not higher than A.
Credit Suisse is the lead arranger.
Kroll Bond Rating Agency, which rated Diamond Resorts' previous four transactions, was not invited to rate the latest transaction. It also assigned an A to the senior tranche of the 2017 transaction.
The notes are initially backed by 9,943 loans ranging from $200 to $148,129 and an average balance of $23.820. All of the loans have terms of 10 years and their weighted average seasoning is 14 months.
Approximately 25% of the proceeds from the note issuance will be deposited into a prefunding account and will be used to acquire additional collateral over the next four months.
S&P expects defaults to reach 16.2% over the life of the deal, in its base-case scenario. That's down from 18.17% for the sponsor's 2017 transaction, but still higher than the expected default rate for the five prior transactions. (S&P did not publish a forecast for cumulative net losses in its presale report.)
While loans backing the latest deal have a higher weighted average FICO score (743 vs 732) and there are no large loans over $150,000, these are not the primary reasons for S&P's lower default expectations.
Rather, the rating agency cited a change in the way that it "stresses" the transaction to account for what it describes as "third-party activities" where Diamond customers are solicited by firms claiming to have the ability to get customer out of their contracts, This activity, which generally results in customers ceasing to make payments, has been increasing significantly since 2015. In 2017, Diamond Resorts' management adopted a plan to address the problem, which S&P described as including "both preventative and corrective actions."
"Although the results from these efforts are starting to show some improvements, the impact is not yet significant on the portfolios," the presale report states.
