Record Timeshare Securitization Issuance Disproves Skeptics

Skeptics move aside: vacation timeshare securitization exceeded all volume records in 2012. With this paper’s attractiveness to investors and issuers, and with continued industry growth, the volume record is poised to be broken again this year.

Despite successful issuance since the 1980s, timeshare remains an underappreciated asset class that offers premium returns relative to its risk.

Yes, timeshares are difficult to analyze because they require both consumer analysis and developer/project analysis. Yes, a timeshare has been, and remains, a discretionary purchase. And yes, there is still a taint to the industry as a result of aggressive marketing practices that were prevalent in its early years and which are sometimes still present.

However, investors who analyze these risks wisely find ample returns on their work and investment. The success of these securitizations throughout the Great Recession demonstrates the robustness of their structures, the good quality of their asset selection and eligibility criteria, and that their credit supports are properly sized.

Since 2002, over $16.4 billion of timeshare securitizations have been placed. As highlighted below, 2012’s record volume of $2.4 billion should be well exceeded this year.

Investor Benefits

Timeshare securitization offers investors attractive returns compared to similarly rated consumer securitizations. Timeshare securitizations have ~3 year weighted average lives and are primarily rated ‘A+, ‘A’, or ‘BBB’.

Timeshare securitizations have a long track record. They passed largely unscathed from the Great Recession. No timeshare securitizations defaulted, and the few that had moderate ratings downgrades were more than matched by those with moderate upgrades. This strong performance was a function of robust transaction structures incorporating significant credit support and well-defined triggers and asset performance that did not deteriorate to unacceptable levels.

My article “The State of Timeshare Securitization and Finance” from Securitization Intelligence’s weekly publication provides additional color on the changing dynamics that should further enhance asset quality and performance going forward. It also describes the timeshare industry and its financial picture in greater detail.

Issuer Benefits

As credit capacity to the vacation timeshare industry continues to be constrained, the increased availability from the securitization market provides a substantial source of essential funding to issuers.

This funding is appealing in several ways, including:

  • it frees up capacity in warehouse lines
  • its all-in-financing rates are low relative to other options, and
  • high advance rates against the underlying securitized assets (vacation timeshare loans) can be achieved.

Prior to the Great Recession, timeshare securitization was primarily an ‘AAA’ market. With market volume increasing and investors gaining additional comfort in lower-rated paper, issuers have obtained significantly higher advance rates by issuing ‘A’, ‘A’ and ‘BBB’ securitizations. Given the near-historic reductions in interest rates, issuers have at the same time obtained low all-in-cost funding.

Several of the timeshare developers who are not affiliated with major lodging brands have obtained pricing through timeshare securitization that is strikingly lower than what they obtain in their other financings.

Market Outlook

The issuance of timeshare securitizations should increase from 2012’s record. It will be driven by the industry’s growth and financing constraints and by increased investor demand for higher returns.

Timeshare securitization’s $2.4 billion of issuance in 2012 in 12 issues from 7 issuers was almost double 2011’s $1.26 billion of issuance in 5 issues from 3 issuers. It also exceeded the previous record of $2.385 billion achieved in 2007, before the Great Recession dug in.

The timeshare industry continues its recovery and growth from the challenges of 2008 and 2009. Its growth continues to be constrained by the availability of credit. In this environment, the benefits of securitization are clear.

With investors increasingly looking for higher returns in this low rate world, and continued strong credit performance in this sector of the market, investor demand for timeshare securitization should continue its strong growth.

Vacation timeshare securitization is solidly on track for another record year.

Judicious Note
By Avi Oster
Managing Director
Judicious Advisors LLC

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