What’s Ahead for Timeshare Asset-Backed Securities?

How freely will consumers spend in 2021? And what portion of their money will go toward travel and vacations? Those are critical questions to answer when determining the prospects for timeshare loan asset-backed securities (ABS).

“Primary factors affecting the timeshare market are the ability and willingness of consumers to repay outstanding debts, of which key drivers for both are employment rates and wages,” says Hollie Reddington, Vice President, U.S. Structured Finance at DBRS Morningstar (dbrsmorningstar.com). As the accompanying story indicates, employment levels and wage growth rates gradually improved in late 2020 but were not strong enough to create a dramatic increase in consumer spending. Another federal stimulus initiative might help budge things along.

On the plus side, consumers might well start to view timeshare opportunities as favorable vacation alternatives. “Given the uncertain economic times ahead, coupled with reduced demand for air travel, the timeshare industry may present a cost-effective option, particularly for timeshare properties that are within driving distance for a particular consumer,” says Reddington. “Looking further ahead, as coronavirus vaccines and therapeutics become available, consumers may become more inclined to start planning a future timeshare stay.”

Another factor affecting timeshare loan ABS transactions is performance of the collateral in existing ABS issuances, particularly the effect of the coronavirus on pool delinquencies and losses, notes Reddington. “In 2020, some sponsors allowed temporary loan modifications (including deferrals under force majeure provisions for some transactions), which may have resulted in slightly improved performance in the short-term. However, as loan modifications expire there may be some deterioration.”

The coming 12 months have some catching up to do. By late 2020, year-to-date timeshare ABS issuance had totaled $2.2 billion, down 36% for the same period of the previous year, according to Finsight. How quickly things return to normal is an open question, says Reddington: “Prospects for the timeshare loan ABS sector in 2021 remain uncertain as Covid-19 is expected to have continuing effects on the overall business activity as well as on travel and tourism.”