IT’S ABOUT TIME…TIMESHARE ABS HOLDS STEADY AS VACATIONS RESUME

[Pages:3]June 2021

IT'S ABOUT TIME...TIMESHARE ABS HOLDS STEADY AS VACATIONS RESUME

By Greg Podhajsky, CFA, Senior Structured Finance Portfolio Manager

2020 was a challenging year for the timeshare industry as operators were forced to close their resorts and sales centers, layoff staff and bring their operations to a virtual standstill. Along with the significant impact to top line revenues, bottom line financial results were affected as timeshare operators increased their provision for loan losses in the first half of 2020 in anticipation of increased consumer defaults within their timeshare loan portfolios. However, the industry withstood the sudden jolt better than expected and has recovered nicely over the past year. The combination of being better positioned because of lessons learned from the Global Financial Crisis, consumers valuing their vacation and putting it as a high payment priority within their budgets, and consumers benefiting from fiscal stimulus, have all aided in the timeshare industry's ability to come through a global pandemic relatively unscathed.

Lessons learned from the Global Financial Crisis

As the age-old adage goes, "shame on you if you fool me once, shame on me if you fool me twice." Timeshare operators learned from their misfortune during the Global Financial Crisis and made substantial changes to their operating models, better preparing them to handle an economic shock like what the world experienced during the Covid-19 pandemic. Heading into 2008, timeshare operators had large levels of resort inventory on their books (typically over three years), retained high levels of balance sheet leverage, lacked diversified sources of financing (heavily reliant on the securitization market), and maintained minimal liquidity to withstand business interruptions. These factors resulted in substantial losses for timeshare operators in 2008 and 2009 and subsequent industry consolidation.

Over the past decade, many timeshare operators switched to acquiring building inventory on an as needed basis (i.e. just in time inventory) and/or transferring construction costs and risks to third-party firms until units are sold, resulting in reduced inventory and leverage levels and overall better balance sheet management. Additionally, timeshare operators came out

of the Global Financial Crisis keenly aware of liquidity and financing risks and diversified their sources of funding to be less reliant on term securitization markets, including multiple warehouse lines for receivables and access to corporate bond markets for secured and unsecured debt. From March 2020 through May 2021, publicly traded timeshare companies issued over $4 billion in non-securitized debt (corporate bonds, bank loans and warehouse lines), while maintaining access to the securitization markets with issuance of $2.3 billion. These additional sources of financing, as well as management's awareness of the necessity to maintain higher levels of ongoing liquidity and reduce expenses and staff quickly when business slows, helped the timeshare industry survive a year like 2020.

These improvements to operating and financing measures helped timeshare operators maintain sufficient liquidity and provided the financial wherewithal to continue their longstanding practice of repurchasing and substituting for defaulted loans within their timeshare securitizations during the Covid-19 pandemic. This practice, in effect, negates the impact of defaulted loans to ABS bonds within a timeshare securitization, as that loan is repurchased or substituted within the securitization at 100% of the defaulted loan amount.

Timeshare loans outperformed expectations

With the shutdown of the travel industry in April 2020 it was widely assumed timeshares, a non-essential good that could not be fully used or used at all during a pandemic, would face payment disruption as consumers defaulted on their timeshare loans. Many major timeshare companies significantly increased provisions for loan losses in expectation of higher defaults. However, despite mild upticks in delinquencies during the initial months of the pandemic, delinquencies remained subdued and a severe increase in loan defaults never occurred (Exhibit 1). In fact, while loan modifications and deferrals were offered by most of the timeshare operators to support consumers through a temporary tough period, they were not used by many timeshare borrowers. According to our research, generally only 2-4% of an operator's timeshare portfolio received payment deferrals or modifications, depending on the issuer. As a result, in the fourth quarter of 2020 and first quarter of 2021, timeshare companies were able to reduce their provision for loan losses on their balance sheets given the substantial increase in predicted loan losses never occurred.

For institutional and professional investor use only.

Aegon Asset Management is the global investment management brand of Aegon N.V. See disclosures for more detail.

IT'S ABOUT TIME...TIMESHARE ABS HOLDS STEADY AS VACATIONS RESUME

Exhibit 1: +60 day delinquencies of seasoned timeshare securitizations have remained relatively stable

4.5%

4.0%

3.5%

3.0%

2.5% Feb-20

May-20

Aug-20

2017 Timeshare Vintages 2018 Timeshare Vintages Nov-20 Feb-21 May-21

Source: Intex from February 2020 through May 2021.

Timeshare supported by strong consumers and value proposition

Increased fiscal stimulus to consumers also likely aided in timeshare loan performance. However, given timeshare owners/borrowers are typically moderate to higher income families with average annual incomes around $73,000, stimulus payments were likely not the main driver of stable industry performance. In addition, minimal change to loan delinquencies and default performance indicates consumers placed substantial value on vacations and made their timeshare loan obligation a high priority payment. This, in part, is likely attributable to the way timeshares work. Timeshares allow consumers to bank their vacation points/days and use them later rather than losing them altogether. Thus, the value of what the consumer is paying for via their timeshare loan remains intact and a vacation delayed due to the pandemic was not a vacation lost.

Timeshare industry withstands a global pandemic

2020 was a challenging year for the timeshare industry; however, lessons learned from the Global Financial Crisis better prepared timeshare operators to handle the challenges of the Covid-19 pandemic. Timeshare companies have reopened over 90% of their sales centers and resorts across the US and are reporting strong bookings at their resorts heading into the primary summer and fall travel seasons. While there will be new challenges for the industry to overcome, such as higher cleanliness and social distancing standards, consumer demand for travel is clearly returning. This is providing momentum for the industry to once again flourish, reinforcing our view on the stability of the timeshare loan ABS sector and its relative value versus other ABS sectors.

Structured finance with Aegon Asset Management

The US Structured Finance team has navigated multiple credit cycles since the inception of the asset class in the late 1980s. The team leverages a repeatable process to evaluate creditworthiness and the relative value of investments in the structured finance universe. The research team covers all structured finance sub-sectors across the quality spectrum and collaborates with the firm's global credit research analysts on the fundamental strength of issuers and leverages real estate professionals from Aegon AM's real assets platform. The team has the ability and experience to understand collateral and complex deal structures, helping the team identify opportunities to oscillate risk at market inflection points.

2

IT'S ABOUT TIME...TIMESHARE ABS HOLDS STEADY AS VACATIONS RESUME

Disclosures

This material is provided by Aegon Asset Management (Aegon AM) as general information and is intended exclusively for institutional and wholesale investors, as well as professional clients (as defined by local laws and regulation) and other Aegon AM stakeholders.

This document is for informational purposes only in connection with the marketing and advertising of products and services, and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all Aegon Asset Management investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. It has not been prepared in accordance with any legal requirements designed to promote the independence of investment research, and may have been acted upon by Aegon AM and Aegon AM staff for their own purposes.

The information contained in this material does not take into account any investor's investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. Aegon Asset Management is under no obligation, expressed or implied, to update the information contained herein. Neither Aegon Asset Management nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity for purposes of any applicable US federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.

Past performance is not a guide to future performance. All investments contain risk and may lose value. Structured Products (such as ABS, MBS and CLOs) are complex instruments typically involving a high degree of risk and

Contact us:

may not be suitable for all investors. The market value of these instruments may be affected by changes in economic, financial, and political environment (including but not limited to spot and forward interest and exchange rates), as well as market, maturity and credit quality of the issuer.This document contains "forward-looking statements" which are based on Aegon AM's beliefs, as well as on a number of assumptions concerning future events, based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance, and actual outcomes and returns may differ materially from statements set forth herein.

The following Aegon affiliates are collectively referred to herein as Aegon Asset Management: Aegon USA Investment Management, LLC (Aegon AM US), Aegon USA Realty Advisors, LLC (Aegon RA), Aegon Asset Management UK plc (Aegon AM UK), and Aegon Investment Management B.V. (Aegon AM NL). Each of these Aegon Asset Management entities is a wholly owned subsidiary of Aegon N.V. In addition, the following wholly or partially owned affiliates may also conduct certain business activities under the Aegon Asset Management brand: Aegon Asset Management (Asia) Limited (Aegon AM Asia).

Aegon AM UK is authorised and regulated by the Financial Conduct Authority (FRN: 144267) and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon AM US and Aegon RA are both US SEC registered investment advisers. Aegon AM US is also registered as a Commodity Trading Advisor (CTA) with the Commodity Figures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). Aegon AM NL is registered with the Netherlands Authority for the Financial Markets as a licensed fund management company and on the basis of its fund management license is also authorized to provide individual portfolio management and advisory services in certain jurisdictions. Aegon AM NL has also entered into a participating affiliate arrangement with Aegon AM US. Aegon AM Asia is regulated by the Securities and Futures Commission of Hong Kong (CE No. AVR688) to carry out regulated activities in Dealing in Securities (Type 1) and Advising on Securities (Type 4).

?2021 Aegon Asset Management or its affiliates. All rights reserved.

Adtrax: 3618103.1GBL Exp Date: June 30, 2023

3

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download