With consumer spending on the rise and investors warming to more esoteric assets, timeshare operators are increasingly turning to the securitization market to finance loans.
Bonds backed by vacation ownership interval loans performed consistently through the financial crisis, helped by strong credit enhancement, and today’s investors have the benefit of more granular data available on current deals. Access to subordinate paper in recent deals, in particular, also provides buyers with a higher yielding investment alternative and issuers with high leverage levels.
Issuance this year is expected to, at the very least, match the $2.3 billion sold in 2012, according to ASR figures. That figure was double the $1.2 billion issued in 2011. By comparison, in 2008 issuers placed less than $700 million of bonds backed by timeshare loans.
Diamond Resorts kicked off the 2013 issuance calendar in January with its first deal in two years, the $93.56 million Diamond Resorts Owner Trust 2013-1. The transaction’s ‘A+’-rated and ‘A’-rated notes had fixed-rate coupons of 1.95% and 2.89%, respectively, for an overall weighted average coupon rate of 2%.
Wyndham Worldwide, a more regular issuer, followed suit in March with the $300 million Sierra Timeshare 2013-1 Receivables Funding. It consisted of two tranches of notes with coupons of 1.59% and 2.39%, for an overall weighted average coupon of 1.77%. For the ‘A’-rated $230.78 million senior tranche, that was the equivalent of 100 basis points over the interpolated swaps curve.
By comparison, Wyndham’s previous deal in October 2012 had an ‘A’-rated tranche that priced at 130 basis points over interpolated swaps for a fixed rate coupon of 1.87%; the triple-B notes priced at a spread of 210 basis points with a coupon of 2.66%, for a weighted average coupon of 2.06%.
Mike Hug, Wyndham’s executive vice president and chief financial officer, said that securitization remains “the most efficient market “to get financing. “The alternative for developers is some type of receivables financing hypothecation facility which will come at a lower advance rate and much higher cost of funding,” he said in a telephone interview.
Wyndham issues about $1 billion of timeshare ABS a year. It expects to do a total of three deals in 2013, in keeping with its recent pattern.
“We have been able over the past couple of years to basically securitize nearly everything that we have originated,” Hug said. “So I would say that an increase in our securitization activity would just be commensurate with an increase in our growth of the business — if our business grows 6% our securitization activity increases at that level.”
Hug said that the stable performance of this asset class over the past three years has boosted investor confidence.
Delinquencies on securitized timeshare loans increased to 3.55% in the fourth quarter of 2012 from 3.28% in the third quarter, according to the latest index results from Fitch Ratings.
Fourth quarter delinquencies were down moderately from 3.82% a year earlier, however.
Fitch said delinquency trends have largely “normalized” at their historical levels after increasing dramatically in 2008 and 2009.
As expected, defaults also rose, to 0.75% in the fourth quarter from 0.60% in the third quarter, but remained at the same level observed at the same time last year.
Fitch has a “stable” outlook for timeshare ABS. That’s partially because these deals are structured in such a way that leverage decreases over time. They also have ample levels of credit enhancement.
“Everyone in the industry has put more focus on lending practices, which obviously affects portfolio quality and gets the investor more comfortable with these transactions,” Hug said. “I think many investors are very pleased with the results that they have seen.”
Since 2010, over 15 new investors, including money-market funds , insurance companies and hedge funds, have entered the space according to Hug. He said this new money has created more capital for the asset class.
Kroll Bond Ratings Agency (KBRA) attributes the stable performance of the asset class to two factors: timeshare loans typically do not represent a huge payment for borrowers, making it relatively easy for them to stay current; also, over time lenders have incorporated improved underwriting, and increasingly look at credit attributes such as FICO scores when initiating loans.
“Performance has been relatively stable and lenders now capture credit scores, which allows us to zero in more closely on what the loss expectation would be for each pool as we can project losses based on FICO score tiers for each pool,” said KBRA analyst Rosemary Kelley.
KBRA has yet to rate a timeshare deal, but in January the agency published ratings criteria for the asset class.
Credit scoring is today an essential component of timeshare developers’ underwriting criteria. According to ARDA International Foundation, 76.9% of timeshare operators responding to its 2010 Financial Performance Survey reported that they use FICO scoring; that figure was up from 69.2% of respondents in 2008.
Not only are more operators using credit scoring, they are also tightening underwriting criteria. In 2011 timeshare operators that issued securitizations focused on customers with FICOs of between 700 and 725. According to the ARDA survey, the average FICO score on loans held in operators’ receivable portfolios in 2009 was 683. The FICO requirements continue to be stringent for 2012 deals; despite improvement in the consumer economy, with weighted average FICO scores ranging between 684 and 737.
Deals issued post-crisis also have higher advance rates, industry lingo for the percentage of the value of an asset that lenders will allow borrowers to finance.
For any timeshare developer, the securitization market is at its most efficient when advance rates are at 85% and 90%, according to Wyndham’s Hug.
Typically, lenders take into account the credit scoring of the borrower in determining an advance rate. After confirming the current market value of the asset offered as collateral, the lender will notify the borrower of the maximum amount that can be borrowed.
In 2008, advances on customer receivables fell to rates below 60%; this decreased the leverage possible from securitizing timeshare loans and increased the cost at which capital could be raised. The weighted average advance rate on securitizations that occurred in 2009 was 67.8% in 2009. By 2012 issuers were able to structure deals with advance rates between 87% and 96%, similar to rates pre-crisis levels, according to data Barclays presented at a panel on emerging ABS at the American Securitization Forum’s annual conference in January.
Diamond Resorts’ January deal was structured with an advance rate of 95%; Wyndham’s October 2012 deal had an advance rate of 89%.
The market isn’t just opened to larger players; a number of medium-sized issuers are returning. Orange Lake, which was last in the market in 2006, issued OrangeLake 2012-A in January of last year; Bluegreen Corp., absent from the market since 2010, also did one deal last year; as did Marriott Vacations Worldwide, which was also last in the market in 2010. As mentioned above, Diamond Resorts’ January deal was the issuer’s first since 2011. Westgate Resorts, which had not accessed the market with any frequency since 2007, also did three deals in 2012.
In a press release issued in December in connection with its most recent deal, Westgate said that the securitization market allowed the company to eliminate refinancing risk on its portfolios. The deals also gave Westgate “access to a large number of new investors” and “the ability to lock in financing at cheaper fixed-rate costs.” The weighted average costs of the deals the issuer did in 2012 are less than the previous floating-rate expenses the company paid for financing.
In its January 2012 deal, Orange Lake priced the single-A notes with a fixed rate coupon of 3.44% and the subordinated notes at 4.87%, for an overall weighted coupon rate of 3.77%.
In its September 2012 deal, Bluegreen was able to issue its triple-B notes at a fixed rate coupon of 3.99%. The deal’s single-A notes were issued at a fixed rate coupon of 2.66% and together the blended average coupon rate for the deal was 2.94%.