Credit Acceptance Announces Completion of $200.0 Million Asset-Backed Financing

Rhea-AI Summary

Credit Acceptance Corporation (Nasdaq: CACC) announced a $200.0 million asset-backed non-recourse secured financing transaction. The company conveyed loans worth $250.1 million to a special purpose entity, issuing three classes of notes with varying interest rates. The financing will have an expected average annualized cost of 7.8%, revolve for 36 months, and be used for debt repayment and general corporate purposes.

Financial Analyst

The completion of Credit Acceptance Corporation's $200 million asset-backed non-recourse secured financing is a significant transaction that merits a closer examination of its financial implications. The structuring of the financing involves the conveyance of loans to a special purpose entity and the subsequent issuance of notes with varying interest rates. Notably, the interest rates range from 6.95% to 8.30%, which appears to be higher than the average for such debt instruments, reflecting a potentially higher risk profile of the underlying consumer loans.

The financing's expected average annualized cost of around 7.8% is a crucial figure for stakeholders, as it impacts the company's cost of capital and profitability. The revolving nature of the financing for 36 months provides Credit Acceptance with a degree of flexibility in managing its liquidity. However, the subsequent amortization based on loan cash flows could introduce variability in financial obligations over time. The use of proceeds for repaying existing debt and for general corporate purposes suggests a strategic approach to balance sheet management, potentially improving the company's creditworthiness and financial stability.

Credit Risk Analyst

From a credit risk perspective, the decision by Credit Acceptance Corporation to utilize asset-backed non-recourse secured financing is noteworthy. The special purpose entity mechanism isolates the financial risk of the loan pool from the company's broader financials, which can be advantageous in managing and containing potential defaults. The interest rates for the notes, particularly for Class C at 8.30%, indicate a higher risk premium, which could be attributed to the credit quality of the underlying loans, typically extended to consumers with poor credit history.

Additionally, the allocation of only 4.0% of the cash flows for servicing expenses, with the majority being used to repay principal and interest, suggests a lean operational cost structure for servicing the loans. However, the emphasis on preserving dealer relationships and dealer holdback payments indicates a reliance on these dealers for future business, which could pose concentration risks if dealer performance fluctuates. Stakeholders should monitor the performance of the underlying loan assets closely, as they directly affect the cash flows and the ability to meet financial obligations associated with the issued notes.

Market Research Analyst

Analyzing the broader market implications of this financing deal, one must consider the competitive landscape of auto financing, particularly for consumers with subprime credit ratings. Credit Acceptance Corporation's strategic focus on providing financing to this consumer segment enables automobile dealers to expand their customer base and can drive sales volumes. The company's established network and its impact on consumers' credit scores provide a competitive edge and potential for customer loyalty.

However, the auto financing market is sensitive to economic cycles and a downturn could lead to higher default rates, affecting the cash flows from the underlying loans. The company's approach to financing, reporting to credit agencies and the potential improvement of consumers' credit scores is a double-edged sword; it can lead to customer retention and upward mobility in credit quality but also exposes the company to the risk of consumers transitioning to more traditional financing options. The impact of this financing transaction on Credit Acceptance's market position will depend on its ability to manage these risks while capitalizing on its unique value proposition.

Southfield, Michigan, Feb. 27, 2024 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq: CACC) (the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) announced today the completion of a $200.0 million asset-backed non-recourse secured financing (the “Financing”).  Pursuant to this transaction, we conveyed loans having a value of approximately $250.1 million to a wholly owned special purpose entity which will transfer the loans to a trust, which will issue three classes of notes:

Note Class			Amount			Interest Rate
	A		$	106,094,000			6.95 %
	B		$	43,893,000			7.68 %
	C		$	50,013,000			8.30 %

The Financing will:

• have an expected average annualized cost of approximately 7.8% including placement agent fees and other costs;
• revolve for 36 months after which it will amortize based upon the cash flows on the conveyed loans; and
• be used by us to repay outstanding indebtedness and for general corporate purposes.

We will receive 4.0% of the cash flows related to the underlying consumer loans to cover servicing expenses.  The remaining 96.0%, less amounts due to dealers for payments of dealer holdback, will be used to pay principal and interest to the institutional lender as well as the ongoing costs of the Financing.  The Financing is structured so as not to affect our contractual relationships with dealers and to preserve the dealers’ rights to future payments of dealer holdback.

Description of Credit Acceptance Corporation

Since 1972, Credit Acceptance has offered financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing.

Without our financing programs, consumers are often unable to purchase vehicles or they purchase unreliable ones.  Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.  Credit Acceptance is publicly traded on the Nasdaq Stock Market under the symbol CACC.  For more information, visit creditacceptance.com.

What was the value of loans conveyed in the financing transaction by Credit Acceptance Corporation?

Credit Acceptance Corporation conveyed loans worth approximately $250.1 million in the financing transaction.

What are the interest rates for the three classes of notes issued in the financing transaction by Credit Acceptance Corporation?

The interest rates for the three classes of notes issued by Credit Acceptance Corporation are 6.95% for Class A, 7.68% for Class B, and 8.30% for Class C.

How long will the financing transaction revolve before amortizing based on cash flows?

The financing transaction will revolve for 36 months before amortizing based on the cash flows on the conveyed loans.

What will Credit Acceptance Corporation use the financing for?

Credit Acceptance Corporation will use the financing for repaying outstanding indebtedness and for general corporate purposes.

What percentage of cash flows related to the consumer loans will Credit Acceptance Corporation receive for servicing expenses?

Credit Acceptance Corporation will receive 4.0% of the cash flows related to the consumer loans to cover servicing expenses.