Wyndham Worldwide earned an AAA from Fitch Ratings on its next securitization of timeshare loans, but not because of a big improvement in the credit quality of the collateral.

Rather, the resort operator opted to pay up in the form of additional credit enhancement on the senior tranche of notes to be issued in the $350 million transaction, Sierra Timeshares 2018-2. The $160.89 million of Class A notes benefit from 61.79% “hard” credit enhancement, which is 30.25 percentage points higher than the senior tranche of the previous deal rated by Fitch, which was rated two notches lower at A.

Bloomberg News

Hard credit enhancement consists of overcollateralization (the balance of the loans used as collateral exceeds the balance of notes being issued), a reserve account and subordination of the Class B and Class C notes. There is also “soft” credit enhancement provided by excess spread: The interest paid on the collateral is expected to exceed interest paid on the note by 9.64% per annum.

That’s significantly higher level of investor protection than some of Wyndham’s peers in the timeshare industry have to pay for an AAA from Fitch. For example, Marriott Vacation Worldwide earned an AAA on the senior tranche of a deal completed in June with only 26.9% credit enhancement. And Vistana Signaure Experiences earned an AAA on a deal completed last year with 28.9% credit enhancement.

Wyndam’s latest deal also includes two subordinate tranches: A $109.37 million tranche of Class B notes has preliminary A ratings and 34.04% credit enhancement, still higher than the A rated tranche of the previous deal; and $79.74 million of Class C notes have preliminary BBB ratings and 13.85% credit enhancement.

Credit Suisse Securities is the lead underwriter.

The notes are backed by a pool of fixed-rate timeshare loans originated by two subsidiaries, Wyndham Vacation Resorts (WVRI) and Wyndham Resort Development Corp. (WRDC). According to Fitch, the overall credit quality of the collateral is stable. The weighted average original FICO score of the pool is 724. Overall, the 2018-2 pool is generally unchanged from an individual FICO band perspective for both platforms relative to the 2017-1 transaction.

On a positive note, there’s a slightly higher proportion of loans originated by WRDC (67.9%), which tend to perform better, even on a like-for-like FICO basis, according to Fitch.

However, the average principal balance for 2018-2 increased to $21,018 from $18,820 in 2017-1. The increase is attributed to the decrease of called collateral, which is further amortized and has a lower current principal balance. Prior transactions ranged between $16,203 and $23,615 since the 2011-1 securitization.

Fitch expects losses over the life of the deal to reach 19.3%; that’s up slightly from its expectation of 18.8% cumulative gross losses for the 2017-1 transaction.

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