While issuance has slowed in virtually every sector of the credit markets, time-share securitizations remain relatively untouched by investor hesitation and the credit crunch, according to market participants, who noted that deal flow has been the same, if it has not increased, over the last six months.
Most recently, Citigroup Global Markets and Credit Suisse came to market earlier this month with a $246 million time-share deal, Marriott Vacation Club Owner Trust 2008-1. The deal was structured in a single tranche and rated triple-A with pricing at 325 basis points over swaps and close to a four-year average life.
Also this month, UBS closed a $115 million time-share deal, Silverleaf Timeshare Loan-Backed Notes 2008-A. Triple-A paper priced 500 basis points over swaps with a two-and-a-half-year average life. Double-A paper priced 550 basis points over swaps with the same average life.
In March, Bluegreen Corp. closed a private offering and sale of $60 million of time-share loan-backed securities.
While troubles in the housing market have left consumers strapped for cash, Bluegreen's vacation ownership sales rose 4% to $90.3 million in 1Q08 from $86.9 million in 1Q07.
Though total delinquencies on U.S. time-share ABS had grown in late 2007 - rising to 3.82% in December, the highest level since a steep drop-off beginning in May 2005 - they began to decline in 1Q08, according to the Fitch Ratings' time-share ABS index, a grouping of performance statistics on pools of securitized time-share loans.
Part of the rise in delinquencies was attributable to the typical seasonal performance deterioration during the winter, the rating agency noted. January through March performance data showed decreases in both early-stage and overall delinquency rates, which indicate that delinquencies have begun to recede, Fitch said.
Indeed, last month, Bluegreen Corp. said that as of March 31, 2008, 30-plus-day delinquencies in its vacation ownership receivables portfolio were 3.9%, down from 4.5% at Dec. 31, 2007. This is consistent with historical seasonal patterns. The average annual default rate for the 12 months ended March 31, 2008 was 7.9%, up from 7.3% for the 12 months ended March 31, 2007, but down from 8.5% in 2004 and 2005.
While there has been a slight uptick in delinquencies, there have been no defaults of existing deals, said Gilbert Liu, attorney at Baker & McKenzie.
Performance Levels Are Sustained
Indeed, though a number of ABS sectors, including timeshare receivables, linked to the health of the consumer have negative asset performance outlooks from Fitch, delinquency and default trends within the timeshare space continue to perform stronger than expected, said John Bella, managing director in Fitch's ABS group.
In 1Q08, Standard & Poor's said it did not take any rating or CreditWatch actions on transactions backed by time-share loan receivables.
However, time-shares are not completely immune to macro-economic factors that could hurt performance. Defaults and delinquencies are expected to rise, but to what extent they do rests on the direction of the economy and, more specifically, on the growth of the unemployment rate which could futher pressure consumers.
Despite the economic uncertainties, the investor base for these transactions has remained relatively stable. "There is a set of investors who are knowledgeable about this industry, and they keep coming back," Liu said. These are buyers who have taken the time to understand the sector and typically do not just purchase from one transaction, he said. Liu also noted that, in the last few months, he has seen interest from new investors.
Also helping new issuance is the fact that, while spreads have widened in the sector as the index has dropped, the cost to issue is not up that much for developers, Liu said.
However, developers are increasingly taking a "risk-based pricing" approach to the loans, offering lower rates to obligors with better credit histories, which might mean prepayment rates will decline down the road, S&P said in a report last week.
Prepayments have averaged 91 basis points since August 2007, even during 1Q08. This is compared with 114 basis points in 1Q07, S&P said. Across the individual trusts, quarterly average prepayment rates ranged between 40 bps and 325 bps.
But the industry does not face the same risk seen in the MBS markets. The payment and loan characteristics of a typical timeshare loan differ in significant ways from many mortgage loans, Bella said.
Some of these critical differences include the all-fixed coupon nature of the payments, the tenor of the loans, and the significantly smaller payment to income percentage of a timeshare loan versus a mortgage loan. Importantly, timeshare assets are not assumed to appreciate in asset value, Bella also noted.
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