–$147,640,000 class A asset-backed notes ‘Asf'; Outlook Stable;
–$17,360,000 class B asset-backed notes ‘BBBsf'; Outlook Stable.
KEY RATING DRIVERS
Ratings Capped at ‘Asf': Given that this is only the second ABS transaction by LV Tower, the limited managed pool data and the unique counterparty arrangements, the ratings for 2016-A were capped at ‘Asf’.
Strong Obligor Credit Quality: The 2016-A pool has a weighted average (WA) Fair Issac Corp. (FICO) score of 740. This is down slightly from Elara 2014-A at 743. Based on the slightly weaker collateral pool, Fitch has arrived at a cumulative gross default (CGD) proxy of 13.50%.
Single Timeshare Site: The loans are associated with a single resort, Elara, in Las Vegas. However, these owners have the same usage and exchange rights as other HRC timeshare owners and become club members within HRC’s system. As such, the risk associated with a single-site property is mitigated.
Presence of Prefunding Account: The 2016-A transaction features a prefunding account that will hold up to 20% of the initial note balance after the closing date to purchase eligible timeshare loans.
Available CE Structure: Initial hard credit enhancement (CE) is expected to be 16.00% and 6.00% for class A and B notes, respectively. Soft CE is also provided by excess spread and is expected to be 8.86% per annum.
Quality of Origination/Servicing: LV Tower and HRC have demonstrated sufficient abilities as an originator and servicer of timeshare loans, respectively. This is evidenced by the historical delinquency and loss performance of HRC’s managed portfolio and previous transactions.
Legal Structure Integrity: The legal structure of the transaction should provide that a bankruptcy of LV Tower, HRC or GVS would not impair the timeliness of payments on the securities.
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.
Thus, Fitch conducts sensitivity analysis by stressing both a transaction’s initial base case CGD and prepayment assumptions by 1.5x and 2.0x and examining the rating implications on all classes of issued notes. The 1.5x and 2.0x increases of the base case CGD and prepayment assumptions represent moderate and severe stresses, respectively, and are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust’s performance.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from Ernst & Young LLP. The third-party due diligence information was provided in Form ABS Due Diligence-15E and focused on a comparison and re-computation of certain characteristics with respect to 200 sample loans. Fitch considered this information in its analysis and the findings did not have an impact on the agency’s analysis. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link at the end of this rating action commentary.
Fitch’s analysis of the Representations and Warranties (R&W) of this transaction can be found in the report titled ‘Elara HGV Timeshare Issuer 2016-A, LLC — Appendix’. These R&W are compared to those of typical R&W for the asset class as detailed in the special report ‘Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions’ dated May 31, 2016.
Additional information is available at www.fitchratings.com.
Elara HGV Timeshare Issuer 2016-A, LLC (US ABS)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
Criteria for Rating U.S. Timeshare Loan ABS (pub. 16 Jun 2016)
Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Elara 2016-A Appendix
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
Fitch Ratings, Inc.
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