[B]Disney takes more of the burden of troubled time-share mortgages from Citigroup[/B]
With a growing number of time-share buyers defaulting on their loans, the Walt Disney Co. recently assumed more than $200million in additional liability to preserve a credit agreement between its time-share subsidiary and banking giant Citigroup.
The maneuvering involves a 1999 agreement in which Celebration-based Disney Vacation Club would bundle together time-share mortgages it issued to individual buyers and sell them to Citi. The process, known as securitization, became a lucrative source of income at Vacation Club in recent years, generating an estimated $40million in operating profit for the unit during Disney’s 2008 fiscal year.
Citi stopped buying the mortgages from Disney in December, when the two sides were unable to agree to new terms amid tight credit-market conditions. But the bank still owns about $422 million worth of Vacation Club loans, excluding interest, according to regulatory filings.
Under the original deal, Disney remained responsible for some of the losses if buyers defaulted on loans that had already been sold to Citi. Earlier terms called for Disney to cover up to 18 percent of the outstanding principal amount in the event of losses, or about $76 million of the current value.
But under new terms negotiated sometime between April and June, Disney agreed to backstop losses of as much as 70percent of the outstanding principal on the loans. That equates to approximately $295 million — or about $219 million in extra liability.
The decision to take on the extra liability apparently centered on Disney’s ability to reacquire troubled Vacation Club loans from Citi.
Disney has for years opted to take back defaulting loans from Citi and replace them with sounder ones. Doing so ensures Disney, rather than the bank, will handle foreclosure proceedings.
That’s important because Disney does not want a nasty foreclosure process to alienate Vacation Club members, even if they are currently in financial distress. The people who buy Disney time shares, after all, are intensely loyal customers who also spend money on Mickey Mouse plushes, Pixar movies and Hannah Montana makeover kits.
Further, Disney prefers to reacquire Vacation Club time-share interests itself. That prevents a third party — such as a bank with no interest in owning a piece of a time share — from dumping cheap resales onto the market and potentially undercutting Disney’s own sales.
But Disney’s ability to continue swapping loans out of the credit agreement with Citi was in jeopardy. Although the company did not disclose precisely why, one potential reason is that the number of loan defaults had risen so sharply that it threatened to violate thresholds set in the original credit pact.
The entire time-share industry is grappling with rising defaults. The industry-wide default rate was 7.9percent in 2008, up 30 percent from 2007, according to the American Resort Development Association. It has continued to grow in 2009, rising 31 percent during the first quarter of the year from the first quarter of 2008.
Disney says the default rate at Vacation Club is lower than the industry average, though it would not provide specific figures. It has also said it is pleased with the pace of sales at the unit, which this week opened the long-awaited Bay Lake Tower next to Disney’s Contemporary Resort, even though sales overall have slowed amid the challenging economic environment.
A spokeswoman for Citi would not comment on the bank’s dealings with Disney. A spokesman for Disney characterized the decision to take on extra liability as one designed to protect Vacation Club customers.
“This is an adjustment that assures Disney can continue providing the top-quality service our DVC members have come to expect,” Disney spokesman Jonathan Friedland said.