Add Welk Resort Group to the list of timeshare operators buying bad loans out of securitization trusts.
The company, which was founded by the late band leader and television celebrity Lawrence Welk, is returning to the securitization market after a two-year hiatus. Kroll Bond Rating Agency’s presale report for the new deal, Welk Resorts 2017-A, devotes considerable space to the performance of the previous two transactions, which to date have experience no defaults – but only because the sponsor has repurchased bad loans and substituted new ones.
The actual cumulative default rate for the June 2015 transaction, before the substitutions and repurchases, is 10.49%, according to Kroll. Welk has the option to repurchase up to 15% of the original collateral balance to substitute up to 20%.
Kroll’s presale report doesn’t indicate why borrowers in the 2015 transaction are defaulting at such a high rate. However at least one other timeshare operator, Diamond Resorts, has been repurchasing loans from its securitization trusts that have defaulted as the result of legal act (not specified by Kroll).
And like several other operators, Welk has made changes to its business model that do not sit well with some members . It originally sold deeded ownership interests at fixed locations, but has since converted to a system in which consumers buy points that can be used toward a stay at a choice of timeshare locations.
Several timeshare operators are reportedly battling lawsuits related to these kinds of business practices.
Welk has made some improvements since the 2015 transaction, according to Kroll, including adding new resorts and enhancing its sales training and compliance programs. It has also modified its vacation ownership interest and financing terms, offering short-term vacation ownership products with a lower level of commitment.
Nevertheless, Kroll thinks that the collateral for Welk Resorts 2017-A is riskier than the collateral for the 2015, and it expects to see higher actual cumulative losses. The rating agency does not give credit in its rating analysis for loan repurchases and substitutions.
Compared with the 2015 deal, the loans backing Welk Resorts 2017-A have a lower average FICO of 714 (vs 724), higher average loan balance of $18,758 (vs $18,000) as Welk is selling larger rooms and upgrading point packages. Borrowers also have lower equity (17.17% vs 20.16%) and pay higher coupons (14.52% vs 13.77%).
Kroll expects cumulative gross defaults (before any repurchases and substitutions) for the 2017 deal to reach 15.60%, compared with its expectations of 12.15% for the 2015 deal.
The offering consists of two tranches of notes with a legal, final maturity of June 2033. In order to achieve an A rating on the $121.09 million senior tranche, Welk had to offer significantly more credit enhancement: 24.5 %, up from 15.25% for the 2015 deal. The $27.94 million subordinate tranche benefits from the same 6.5% credit enhancement as the comparable tranche of the previous deal, but is rated one notch lower, at BBB (vs BBB+).