Fitch: US Timeshare ABS Performance Will Be Stable in 2015

The stability of US timeshare ABS performance and ratings in 2014 will continue through 2015, Fitch Ratings says. Transactions remain sufficiently enhanced and most macroeconomic and industry fundamental trends are positive. Fitch also expects modest growth in the timeshare ABS segment during 2015.

This outlook is due, in part, to the delevering structures found in timeshare transactions and ample credit enhancement levels. Moreover, timeshare ABS issuers routinely substitute or repurchase defaulted loans up to a certain amount. However, Fitch does not weigh this factor in its analysis.

Timeshare ABS issuers capitalized on strong investor demand to access the market at lower all-in rates during 2014. Industry fundamentals are mostly positive. A growing demand for leisure and recreation has come with improving economic indicators, including the decrease in US unemployment. While companies have leaned on upgrading existing customers for growth in the past, Fitch may see larger concentrations of new customer loans in ABS portfolios going forward. Fitch views upgraded loans in ABS transactions positively as these borrowers have a proven payment history and tend to outperform new originations.

Other shifts in the composition of ABS pools are possible. Recent years have seen a move to growth focused in the capital-light or fee-for-service model from the traditional developer financed projects. Timeshare originators have also expanded to foreign markets for new property locations and customers. This could lead to slightly higher issuance volumes.

After rising steeply during the credit crisis, delinquencies have returned to historically normal levels. The Fitch timeshare ABS index reports total delinquencies as of fourth-quarter 2014 data at 2.95%, up slightly from 2.79% at third-quarter 2014 and down from 3.38% at the same time a year prior. We have observed consistent, quarterly, year-over-year improvement since 2012. Defaults, while still somewhat elevated compared to prerecessionary levels, displayed modest improvement in 2014. The index reports 0.56% in defaults as of fourth-quarter 2014 data, consistent with 0.55% in third-quarter 2014 and down from 0.60% at the same time a year prior.

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We provide surveillance on the existing ratings on 20 timeshare transactions from four issuers. Fitch's timeshare portfolio has not suffered a downgrade since 2008. And even then, those downgrades were attributed to the downgrade of a monoline wrap provider and not performance, which was in line with expectations. The vast majority of the portfolio was affirmed in 2014 and one class of notes was upgraded by one category.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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