As of June 2019, outstanding timeshare notes in S&P Global Ratings' Timeshare Performance Index (TSPI) was $5.03 billion, significantly higher than the $3.99 billion in June 2018. This was driven primarily by Wyndham's record $1.2 billion in issuance in 2018 and increases in deal size from some of the major issuers. The first six months of 2019 showed an $840 million decrease in new issuance, so we may see total outstanding debt return to the $4 billion range (where it has been for the past 10 years) as deals mature. As with prior years, all of this sector's 2019 issuance is due to existing issuers issuing new series of notes. The considerable history and size of the timeshare market demonstrate the sector's maturity.

The overall performance of collateral backing U.S. timeshare securitizations is stable but does not appear to be returning to the 2013-2015 levels after the volatility in 2016 brought on by the third party exit companies. As the industry continues to fight these firms, we will wait and watch to see if the industry can eradicate the exit firms' activities or if defaults have in fact hit a new normal. There has been recent success in the industry's efforts to decelerate such activities. While these factors may always be present in the market, we expect them to decline as the issuers, trade groups, and various state attorneys general have become more focused on deterring these efforts. These efforts have resulted in a few closures, bankruptcies, and, in at least one case, the disbarment of an owner. We continue to monitor these third-party exit company issues.

The TSPI, which consists of timeshare term issuance transactions rated by S&P Global Ratings, captures the following information, discussed in detail below:

• Historical performance of publically rated timeshare term issuance with more than two months of performance data;
• Term issuance activity from January 2019 to July 2019;
• Key performance metrics on the underlying timeshare loans; and
• Rating actions, including any CreditWatch placements, on outstanding transactions for the most recent six-month period.

In addition, the Appendix provides detailed definitions of the index variables.

Overview

Table 1

Note, in table 1, that there are very low figures in the excess spread range, and in some months, negative excess spread figures were reported. These are all from the same issuance as the seller/servicer slowed its repurchasing of defaulted collateral; therefore, more losses are hitting the transaction. While the excess spread shows a negative result, there were still sufficient collections and repurchase proceeds to pay all of the debt service and expenses in all periods. No triggers were breached.

Outstanding Transactions And Issuance

As of June 2019, the 49 outstanding term transactions rated by S&P Global Ratings in the TSPI were backed by $5.41 billion in timeshare loan receivables and had an aggregate outstanding issuance amount of $5.03 billion.

Chart 1

From January 2019 through June 2019, we rated five new publicly rated timeshare securitizations, with a total issuance amount of $1.52 billion, compared with seven deals totaling $2.36 billion for the first half of 2018. The new transactions included:

• BRE Grand Islander Timeshare Issuer 2019-A LLC;
• MVW 2019-1 LLC;
• Orange Lake Timeshare Trust 2019-A;
• Sierra Timeshare 2019-1 Receivables Funding LLC; and
• Welk Resorts 2019-A LLC.

In the first half of this year, we removed one timeshare securitization, Diamond Resorts Owner Trust 2015-2, from the TSPI because the notes were fully redeemed before legal maturity.

The Issuers

There are currently eight main issuers in the timeshare securitization market rated by S&P Global Ratings and tracked in the TSPI. Over the past three years, Bluegreen, Sierra, Marriott, Diamond, Hilton, and Orange Lake have demonstrated the most consistency in issuances. As of June 2019, Sierra comprised 30% of the TSPI, followed by Marriot (26%) and Hilton (19%).

Chart 2

Chart 3

Base Default Rates

Although seasoning and FICO scores are only two of the factors we consider in determining a base-case default assumption, we provide the below pool characteristics (see table 2) to give a benchmark indication of the contents of the pool. (Appendix A contains more pool issuance data, and a full ratings analysis is available in the issuers' respective presale reports.)

We base our default assumptions on our analysis of each timeshare developer's historical loan performance, which varies based on the obligors' credit quality, the strength of the developers' timeshare system, and general macroeconomic conditions, among other factors. Our base-case default assumptions for most of the transactions issued since the recent economic downturn have generally been higher than those of prior issuances (from the same developers) because of the underlying loans' increasing defaults. Still, some transactions benefit when we apply a haircut to the default assumption in order to give credit to the highly seasoned (older) loans in their respective pools.

Table 2

Collateral Performance In Line With Previous Year

The delinquencies in the first half of 2019 held steady compared with the same time span last year; the weighted average for first half 2019 was slightly higher than that in the first half of 2018 as well as the 10-year average. Both the peak and trough for the first half of 2019 were close to those in the first half of 2018 as well.

Defaults in the first half of this year edged upward compared with the first of last year, demonstrated by the weighted average rates (elaborated on below).

We weigh the monthly index performance variables by issuer according to the beginning monthly pool balances (see the Appendix for a definition of these variables). We have found that adding newly rated series with little seasoning makes the index variables fluctuate, and the trends tend to normalize as newer pools age. When reviewing the performance charts below, it could be helpful to refer to the annual issuance amounts.

First-Half 2019 Delinquencies Remained Steady

Total weighted average delinquency rates for the first half of 2019 was 4.14%, which was slightly up from 3.94% in the first half of 2018 and about the same as the 4.16% average in the first half of 2017. The weighted average total delinquencies in the first half of this year exceeded that of the second half of the previous year (3.80%), a trend repeated in each of the past three years as a result of the class' seasonality. Throughout the first six months of this year, total weighted average delinquencies ranged from 3.79% to 4.39%, compared with the range of 3.64%-4.30% in the same six-month period in 2018.

The first six months of 2019 saw delinquencies above the 10-year average of 3.86%.

Chart 4

Table 3

First-Half 2019 Monthly Defaults Slightly Rose

The first half of 2019's weighted average monthly defaults (0.85%) exceeded the first six month of 2018 (0.76%) and the 10-year average (0.68%). Defaults in the first half of this year were slightly lower than the 0.88% seen in first-half 2017, however.

While the comparatively lower default levels seen in the first of 2018 were aided by the maturation of five deals exhibiting higher-than-normal default levels prior to that point, the increased default rates in the first half of this year resulted from weaker performance across at least four issuers.

We will continue to monitor the performance of the underlying timeshare loans as the transactions continue paying down.

Chart 5

Table 4

Monthly Repurchases

Since 2005, originators have repurchased or substituted nearly 100% of the defaults in the market. The credit enhancement for each issuer absorbed the remainder. About 47% of the outstanding market note balance is supported by assets originated by a seller that has historically repurchased 100% of its defaulted loans. Likewise, about 53% of the total is backed by assets from sellers that have historically substituted collateral for 100% of their defaults. Very few actual losses are passed through to these issuers.

Although these originators consistently repurchase and substitute for defaulted loans when we assign ratings, we do not assume they will do so because, if we did, we would therefore likely link the ratings on the securitization to the rating on the related originator. However, in conducting surveillance on these transactions, those pools that repurchase collateral are stronger because they have exhibited more performing portfolios.

Timeshare Upgrades In Line With Previous Year

The weighted average monthly upgrades of 0.45% in the first half of 2019 remained in line with those of the same period of last year of 0.44%. As with last year, the first half of 2019's monthly upgrades remains well below the 10-year 0.79% average for upgrades. This demonstrates the continued development of deals previously exhibiting higher upgrade rates fully paying down the bonds this past year, as well as an effort by some issuers to focus on new sales.

Chart 6

Table 5

Monthly Prepayments Fell

The weighted average monthly prepayment rate, which excludes repurchases of defaulted and upgraded loans, averaged 1.00% for the first half of 2019. This is lower than 1.11% in the first half of 2018 but still higher than the 0.77% 10-year average. The first six months of 2019 saw a lower peak (1.07%) and trough (0.96%) than those of 2018 (1.18% and 1.00%, respectively).

Chart 7

Table 6

Excess Spread Dipped

Monthly excess spread averaged 8.92% in the first half of 2019. This is a decrease from both the 9.40% excess spread illustrated in the first half of 2018 and the 8.55% average over the past 10 years. As mentioned in the Overview section, one transaction had instances of negative spread calculations, but since it only accounts for under 1% of the TPSI, its effects were negligible. Excess spread has largely held steady since 2016.

Chart 8

Table 7

Rating Actions

In first-half 2019, S&P Global Ratings' affirmed ratings on 10 timeshare securitizations across the Elara, Wyndham, Bluegreen, Diamond, and Hilton resort systems.

Transaction Surveillance

In addition to reviewing market-level data, we periodically review all rated timeshare securitizations and use surveillance data to identify potential and emerging trends. We monitor transactions to confirm that our ratings reflect our view of their performance and ongoing risk profiles. Our surveillance measures include:

• Analyzing monthly servicer reports detailing the underlying collateral's performance;
• Comparing actual defaults with our initial expectations;
• Conferring with key issuer and servicer management personnel to detect any emerging trends or changes in servicing standards, with on-site visits when applicable;
• Monitoring supporting ratings; and
• Staying informed of related industry developments and events that could have an impact on the rated transactions' overall performance.

Trust Performance Snapshot

We update our trust performance snapshot in conjunction with the release of each index report. This snapshot provides the market with current performance data for individual rated timeshare securitizations at a glance. We use standard definitions (see the Appendix) to facilitate data comparisons across transactions. The delinquency and default trend columns indicate whether the current three-month rolling averages have increased, decreased, or remained flat relative to averages for the prior quarter. The snapshot also includes other important information, such as the top three state concentrations by obligor loan balance and the disclosed weighted average FICO scores as of the initial cutoff date.

Table 8

Related Criteria

• Rating Criteria For U.S. Timeshare Loan Securitization, Oct. 8, 2003

Related Research

• Presale: Welk Resorts 2019-A LLC, May 29, 2019
• Presale: Orange Lake Timeshare Trust 2019-A, May 16, 2019
• Presale: MVW 2019-1 LLC, May 8, 2019
• Presale: BRE Grand Islander Timeshare Issuer 2019-A LLC, March 29, 2019
• Presale: Sierra Timeshare 2019-1 Receivables Funding LLC, March 7, 2019

Appendix: Definitions Of U.S. Timeshare Securitization Performance Index Variables

The TSPI is a performance index that aggregates monthly performance information for S&P Global Ratings-rated timeshare transactions across a number of key risk-related variables.

We determine each trust's weighting by dividing its outstanding pool balance by the sum of the aggregate outstanding pool balances. We weight the monthly index variables according to the beginning monthly pool balances, and we weight the cumulative variables according to the initial pool balances, including any prefunding account balances. We then determine the resulting timeshare loan weighted average performance variables by summing the result of each trust's variables multiplied by each master trust's respective weighting.

Excess spread rate

The rate at which trust income exceeds or falls short of the trust expenses due (including net losses). We calculate the excess spread rate by subtracting the transaction's coupon rate, the servicing fees, and the net losses from the trust's yield.

Gross defaults

The sum of all gross losses (through liquidation) and all repurchased/substituted defaulted loans that have been removed from the collateral pool since the transaction's inception.

Gross losses

The reduction in the principal pool balance, during the reporting period, that resulted from credit losses before the application of principal recoveries. Gross losses do not include the balance of defaulted loans that were repurchased or substituted and only address the balance of loans that were removed from the pool through remarketing or liquidation.

Gross loss rate

The ratio of gross losses to the balance at the beginning of the period.

Net losses

Gross losses minus recoveries.

Net loss rate

The ratio of net losses to the balance at the beginning of the period.

Other income

Aggregate non-principal-related income received from all other sources during the current reporting period (for example, trust investment income and net servicer advances), net of all fees except the servicing fee (bond insurance premiums, swap fees, trustee fees, miscellaneous fees, etc.).

Recoveries

The principal proceeds received during the current reporting period on any gross losses experienced by the collateral pool since origination, net of remarketing expenses and other late fees.

Timeshare upgrade

Some timeshare programs allow owners to trade up by acquiring interests in different (usually larger) properties or by acquiring additional points or vacation credits (more time).

Total income

The aggregate sum of interest income and other income received during the current reporting period.

Transaction coupon rate

The monthly interest rate due on all classes of notes within a given transaction, expressed as an annual percentage.

Yield

The ratio of total income to the balance at the beginning of the period.