Fitch Ratings: Timeshare ABS Outlook Stable Despite Weaker Performance.
Fitch has noted an increase in delinquencies and defaults within the entire timeshare ABS sector over the past year. More recent vintages on managed portfolios and ABS transactions are demonstrating weaker performance relative to 2013-2015 vintages. Due to this weaker performance, base case CGD proxies on Fitch rated transactions in 2018 have included these higher default vintages.
However, as detailed below, the U.S. timeshare ABS index suggests more stable overall performance trends. This inverse relationship is primarily attributed to new ABS transactions being added to the denominator used to calculate the figures in the index, which therefore understates the aforementioned weaker performance trends. While asset performance has softened, no transaction has experienced a loss to date, due to available excess spread and the optional repurchases and substitutions of defaults being employed by the seller. Transaction-specific default levels are expected to remain within Fitch's initial base case proxies.
Total delinquencies for 3Q18 increased to 3.09% from 2.90% in 2Q18. However, this reflects improvement from the 3.31% in 3Q17, which is driven by the addition of several new transactions over the last year, which tend to exhibit low delinquency levels early in their life.
Defaults for 3Q18 declined to 0.60% from 0.68% in 2Q18 and 0.67% a year earlier in 3Q17. Due to the inclusion of new transactions to Fitch's index, on an annualized basis (rolling 12 months), defaults were down to 7.44% for 3Q18, from 8.00% in 2Q18. However, Fitch expects delinquencies and defaults to increase slightly within the index in the near term as is typical of the colder months.
Fitch's timeshare ABS index is an aggregation of performance statistics on pools of securitized timeshare loans originated by various developers. Expected cumulative gross defaults on underlying transactions can range from 8% to 20%. While delinquencies and defaults may vary on an absolute basis, most transactions supporting the index exhibit similar overall trends.
Fitch's timeshare performance index summarizes average monthly delinquency (over 30 days) and gross default trends tracked in Fitch's database of timeshare ABS dating back to January 1997. The index is available on a quarterly basis.
Fitch's stable sector outlook for timeshare ABS anticipates some weaker asset performance but to levels that remain within ratings expectations. Recent performance has weakened slightly, and default rates have increased but are not expected to exceed the 2006-2009 recessionary vintages. Performance pressure for several timeshare loan originators is partially driven by increased paid product exits (PPE) activity. PPE arise when third party companies or legal groups promise timeshare borrowers loan relief in exchange for a fee. PPE have seen an increase since the beginning of 2015 and represent a disproportionate amount of defaults in the recent vintages of some managed portfolios and ABS transactions. However, PPE is unlikely to materially affect timeshare loan backed ABS performance.
Fitch has maintained an open dialog with all major timeshare ABS issuers/timeshare developers regarding the effect of PPE on their portfolio including any potential litigation against timeshare exit companies and the overall efforts to limit it including owner education and reengagement. The American Resort Development Association (ARDA) and timeshare issuers have united to combat PPE based upon fraudulent and misleading representations. Some recent indications suggest a decrease in the use of PPE. Fitch has considered this practice and the effect on the portfolio in the analysis of recent transactions from affected issuance platforms. In particular, managed portfolio vintages and ABS transactions that have experienced elevated defaults due to PPE activity have been included in Fitch's base case proxies.