By Violet Diamant, director of structured finance, Standard & Poor's Ratings Group
Buoyed by the strong U.S. economy and increasing asset-backed securities market acceptance, recreation loan securitization is poised for growth.
The recreation lending industry, which includes loans for boats, recreational vehicles (RVs) and motorcycles, is enjoying healthy expansion, as increasing numbers of affluent baby boomers decide to hit the water or the open road. An upscale borrower demographic and high voluntary prepayment rates are two of the collateral characteristics that distinguish the sector from other consumer asset ABS.
Evaluating Credit Risk
Many factors impact the level of credit support and liquidity needed in marine, RV and motorcycle-backed securitizations. These include the lender's historical loss and delinquency performance; underwriting criteria; servicing and collection procedures; portfolio management and growth strategy; prepayment experience; pool seasoning and selection criteria; and the secondary market value of the vehicles.
A lender's historical loss and delinquency performance is a good indicator of how a securitized pool will perform. Standard & Poor's prefers to see a minimum of five years of static pool data for marine and RV assets, because data spanning a shorter time horizon will not accurately reflect a lender's true performance. Marine and RV loans are long-term assets, with some unique characteristics. Consumer boat loans typically are made for 10 years to 15 years but pay off in under four years. RV loans typically are made for 15 years to 20 years and pay off within four years.
Motorcycle loans resemble auto loans in that they are made for five years to six years and pay off within two years. Analysts prefer to see a minimum of three years of static pool data for this asset type.
Pool Seasoning and Selection Criteria
Strong selection criteria can improve a pool's credit profile relative to the portfolio from which it is drawn.
One receivable characteristic that is a good indicator of a pool's credit quality is the FICO credit scores of the obligors. Boat, RV and motorcycle borrowers tend to have above average credit bureau scores because they have the financial wherewithal to acquire assets to enhance leisure activities.
Another good indicator of a pool's credit profile is the vehicle mix of the pool. In a marine receivable pool, the higher the proportion of the larger ticket pleasure boats, compared to runabouts - bass boats or jet skis - the stronger the pool's credit profile. In a pool of RV loans, the greater the concentration of motorized RVs and conversion vehicles, compared to towable RVs, the better the credit quality of the pool. The same principle applies to motorcycle receivable pools. The buyers of the Harley-Davidson "big bikes," such as fat boys, cruisers, and roadsters, generally are stronger credits than buyers of the less expensive sport bikes.
For recreation assets, there usually is little divergence in credit quality between a buyer looking to buy new or pre-owned.
With respect to Harley-Davidson motorcycles, the demand is much greater than the supply, so the buyer of a used Harley Davidson motorcycle in many cases will have to actually pay a premium for getting the bike right away instead of having to order a new bike and wait six months for delivery.
Pools of marine, RV and motorcycle receivables experience high voluntary prepayments. Industry prepayment experience indicates that most marine and RV loans pay down within four years of origination, regardless of loans size or original maturity. This strong prepayment behavior results from obligors trading up every two to three years or paying off their loans early, rather than from refinancing due to interest rate fluctuations. High prepayments reduce a securitized pool's credit loss exposure by shortening its scheduled life.
Secondary Market Value
The secondary market value of these recreation assets has an impact on credit losses and the amount of credit support needed in a securitization. Boats, RVs and Harley Davidson motorcycles have strong resale values and generally get high recovery rates from the sale of repossessions.
Boats and RVs also do not depreciate in value significantly, and recovery rates from the sale of boat and RV repos are high. Recovery rates for RVs tend to be higher than for boats, mainly because there is no efficient wholesale market for used boats.
The predominant trend in marine, RV, and motorcycle lending is market expansion. There has been healthy growth in marine lending in the last few years. National Marine Bankers Association (NMBA) data estimates overall growth of 20% in 1998.
RV loan volume has risen because of an increase in retail unit sales. According to the Recreational Vehicle Industry Association (RVIA) unit sales increased 13.7% in 1998 from the previous year.
Continued expansion in the motorcycle market is evident. The number of new motorcycle loans originated has grown steadily from 1994 when about 7,000 loans were originated, to 1998 when roughly 23,000 loans were originated.
Low unemployment and interest rates as well as high disposable income should generate higher loan volume for boats, RVs and motorcycles in 1999. The prospect for growth in securitization volume is strong given the securities' market acceptance, the lenders' need for alternative funding and balance sheet management, and the growth in marine, RV and motorcycle lending nationwide.