Diamond Resorts isn’t the only timeshare operator buying bad loans out of securitization trusts.

In a report published Monday, Fitch Ratings noted that a timeshare loan securitization Marriott completed in 2012 has not experienced a net loss to date -- but only because the company is repurchasing bad loans.

The deal, Marriott Vacation Club Owner Trust 2012-1, has experienced defaults, though not as many as Fitch expected when it initially rated the deal: just 9.39% of loans, compared with the rating agency’s initial base case proxy of 12.75%.

But because Marriott repurchased the loans (presumably at face value), bondholders recovered 100% of their principal.

As of the March 2017 servicer report, another 2.17% of loans were more than two months behind on payments. Yet even if these loans were to go bad, and Marriott did not repurchase them, it seems that bondholders would make out ok. That’s because they have yet to burn through any of the credit enhancement built into the deal.

Fitch rates the deal’s Class A notes at AA with a stable outlook (up from A at the time of issuance) and the Class B notes at A with a stable outlook (up from BBB at the time of issuance).

“Due to the growth in credit enhancement levels and loss coverage afforded to the notes, a substantial increase in defaults would have to occur to have a negative impact on the updated ratings,” the report states.

Diamond Resorts has not been so successful maintaining the credit ratings on its timeshare securitizations. Kroll Bond Ratings has the subordinate tranche of two deals completed in 2015 under review for a possible downgrade as a result of the rising number of bad loans backing the deals. Bondholders have yet to sustain any losses, because Diamond, like Marriot, has been repurchasing bad loans from the securitization trust. But Kroll does not take this into account when rating the bonds, because the purchases are at Diamond’s discretion.

In ratings reports, Kroll has indicated that losses on Diamond’s loans are the result of unspecified legal actions. Diamond is reportedly battling two lawsuits over its business practices. 

Fitch’s report does not indicate why loans in the Marriot deal are going bad. However, the company is also the target of lawsuits over its business practices

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