Kroll Bond Rating Agency is maintaining its downgrade watch on portions of Diamond Resorts’ recent timeshare loan securitizations, expressing worries about future default levels.

KBRA on Thursday reported it will keep under downgrade review a pair of subordinate asset-backed notes issued in two of the timeshare operator firm’s asset-backed transactions from 2015.

The Class B notes for both Diamond Resort Owner Trust 2015-1 and 2015-2 were placed on watch last August due to the high levels of loan repurchases or loan substitutions conducted by the trust to replace defaulted loans.  

The defaults – the losses of which have all been borne by Diamond Resorts thus far – apparently stem borrowers who have undertaken legal action against Diamond Resorts for its business practices, under encouragement from a “handful” of law firms encouraging borrowers to use “cease and desist” letters against Diamond Resorts.

The KBRA analyses did not elaborate, but news reports stated the firm has been targeted in a pair of lawsuits for alleged misrepresentations in membership benefits.

“The Watch Downgrade on the class B notes is due to higher default on the underlying timeshare loans that have to date been all repurchased or substituted in each transaction,” KBRA stated in a note issued Thursday. “However, KBRA’s projected future defaults are also higher than originally expected which may result in a downgrade of the class B notes.”

The watch affects the remaining balance of the Class B notes that by last August had amortized to $5.08 million in its DROT 2015-1 tranche (rated ‘A’ by KBRA) , and to $10.9 million in DROT 2015-2 (in which the B notes were rated ‘A-’).

The downgrade watch does not affect the higher-rated Class A notes in both transactions.  

Last September, the company’s parent firm Diamond Resorts International, Inc., completed a merger agreement in which it was acquired in a $2.2 billion stock purchase deal by affiliates of private equity firm Apollo Global Management LLC.   

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