Fitch Rates Sierra Timeshare 2021-1 Receivables Funding LLC
(The following statement was released by the rating agency)Fitch Ratings-New York-17 March 2021:
Fitch Ratings has assigned final ratings and Outlooks to notes issued by Sierra Timeshare 2021-1 Receivables Funding LLC (2021-1). The social and market disruption caused by the coronavirus pandemic and related containment measures have negatively affected the U.S. economy. To account for the potential impact, Fitch incorporated conservative assumptions in deriving the base case cumulative gross default (CGD) proxy. The analysis focused on peak extrapolations of 2007-2009 and 2017-2018 vintages as a starting point. The sensitivity of the ratings to scenarios more severe than currently expected is provided in the Rating Sensitivities section below.
Sierra Timeshare 2021-1 Receivables Funding LLC
----A ; Long Term Rating; New Rating; AAAsf; Rating Outlook Stable
----B ; Long Term Rating; New Rating; Asf; Rating Outlook Stable
----C ; Long Term Rating; New Rating; BBBsf; Rating Outlook Stable
----D ; Long Term Rating; New Rating; BBsf; Rating Outlook Stable
KEY RATING DRIVERS
Borrower Risk — Strong Collateral Quality: Approximately 68.1% of Sierra 2021-1 consists of Wyndham Vacation Resorts, Inc. (WVRI) originated loans; the remaining loans were originated by Wyndham Resort Development Corporation (WRDC). Fitch has determined that, on a like-for-like FICO basis, WRDC's receivables perform better than WVRI's. The weighted average (WA) original FICO score of the pool is 730. Overall, the 2021-1 pool shows a marginal increase in WRDC loans and moderate shift upward in the FICO-band concentrations for the WVRI platform relative to the 2020-2 transaction.
Forward-Looking Approach on CGD Proxy — Weakening CGD Performance: Similar to other timeshare originators, Travel + Leisure Co.'s (T+L [formerly Wyndham Destinations, Inc.]) delinquency and default performance exhibited notable increases in the 2007-2008 vintages, stabilizing in 2009 and thereafter. However, more recent vintages from 2014-2018 have experienced increasing gross defaults versus vintages back to 2009, partially driven by increased paid product exits (PPEs). Fitch's CGD proxy for this pool is 22.40% (lower than 22.50% in 2020-2). Given the current economic environment and increasing gross default trends, Fitch applied a conservative approach to the CGD proxy.
Coronavirus Pressure Continues: Fitch has made assumptions about the spread of the coronavirus and the economic impact of the related containment measures. As a base case scenario, Fitch assumes that the global recession that took hold in 1H20 and subsequent activity bounce in 3Q20 are followed by a slower recovery trajectory from 4Q20 onward with GDP remaining below its 4Q19 level for 18-30 months. To account for this scenario, Fitch's base case proxy focused on prior recessionary vintages of 2007-2009 as well as more recent weaker performing vintages of 2017-2018 to arrive at a 22.40% base case proxy. The CGD proxy accounts for the weaker performance and potential negative impacts from the severe downturn in the tourism and travel industries during the pandemic that are highly correlated with the timeshare sector.
As a downside (sensitivity) scenario provided in the Rating Sensitivity section, Fitch considers a more severe and prolonged period of stress with recovery to pre-crisis GDP levels delayed until 2023 in the U.S. Under the downside case, Fitch also completed a rating sensitivity by doubling the initial base case loss proxy (please refer to Rating Sensitivity section). Under this scenario, the notes could be downgraded by up to three categories.
Structural Analysis — Deal-Over-Deal Lower CE Structure: Initial hard credit enhancement (CE) for the class A, B, C and D notes is 70.20%, 40.70%, 17.00% and 4.50%, respectively. CE is lower for the class A through D notes from 75.50%, 45.25%, 22.75%, and 12.50% respectively, in 2020-2, but remains above pre-pandemic transactions for the class A through C notes. Hard CE comprises overcollateralization, a reserve account and subordination. Soft CE is also provided by excess spread and is 12.0% per year. Loss coverage for all notes is able to support default multiples of 3.50x, 2.50x, 1.75x and 1.25x for 'AAAsf', 'Asf', 'BBBsf' and 'BBsf', respectively. The decline in CE is primarily attributed to a slightly stronger collateral pool than 2020-2, as evidenced by the decline in the base case default proxy.
Originator/Seller/Servicer Operational Review — Quality of Origination/Servicing: T+L has demonstrated sufficient abilities as an originator and servicer of timeshare loans. This is evidenced by the historical delinquency and loss performance of securitized trusts and of the managed portfolio.
Legal Structure Integrity: The legal structure of the transaction should provide that a bankruptcy of T+L and Wyndham Consumer Finance, Inc. (WCF) would not impair the timeliness of payments on the securities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and consideration for potential upgrades. If CGD is 20% less than the projected proxy, the ratings would be maintained for class A notes at stronger rating multiples. For the class B, C and D notes, the multiples would increase resulting for potential upgrade of one rating category, one notch, and one rating category, respectively.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unanticipated increases in the frequency of defaults could produce CGD levels higher than the base case and would likely result in declines of CE and remaining default coverage levels available to the notes. Additionally, unanticipated increases in prepayment activity could also result in a decline in coverage. Decreased default coverage may make certain note ratings susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Hence, Fitch conducts sensitivity analysis by stressing both a transaction's initial base case CGD and prepayment assumptions and examining the rating implications on all classes of issued notes. The CGD sensitivity stresses the CGD proxy to the level necessary to reduce each rating by one full category, to non-investment grade (BBsf) and to 'CCCsf' based on the break-even loss coverage provided by the CE structure. The prepayment sensitivity includes 1.5x and 2.0x increases to the prepayment assumptions representing moderate and severe stresses, respectively. These analyses are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance.
Additionally, Fitch conducts increases of 1.5x and 2.0x to the CGD proxy, which represents moderate and severe stresses, respectively. These analyses are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance. A more prolonged disruption from the pandemic is accounted for in the severe downside stress of 2.0x and could result in downgrades of one to three rating categories.
Due to the coronavirus pandemic, the U.S. and the broader global economy remain under stress, with surging unemployment and pressure on businesses stemming from government social distancing guidelines. Unemployment pressure on the consumer base may result in increases in delinquencies.
For sensitivity purposes, Fitch also assumed a 2.0x increase in delinquency stress. The results indicated no adverse rating impact to the notes.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with third-party due diligence information from Deloitte & Touche LLP. The third-party due diligence focused on a comparison and re-computation of certain characteristics with respect to 150 sample loans. Fitch considered this information in its analysis, and the findings did not have an impact on the agency's analysis or conclusions.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
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