Credit Acceptance Corporation’s CACC long-term corporate family and senior unsecured ratings have been affirmed at Ba3 by Moody's Investors Service, the rating arm of Moody's Corporation MCO. Moreover, the rating outlook remained stable.
Per Moody’s, Credit Acceptance’s credit profile remains strong despite increasing competition within the U.S. subprime auto lending market. The company’s profitability is stable, and it has solid capitalization and leverage.
While Moody's believes that the implementation of the Current Expected Credit Losses (“CECL”) accounting methodology in 2020 will likely adversely impact Credit Acceptance’s reported earnings, the cash flows that it receives will not be affected.
Thus, Moody's assessment of Credit Acceptance’s credit profile remained unchanged and hence formed the rationale behind the ratings affirmation.
Credit Acceptance primarily focuses on offering financing programs, and related products and services to automobile dealers in the United States, enabling them to sell vehicles to consumers irrespective of their credit history.
It offers financing programs through a country-wide network of automobile dealers. These dealers benefit from vehicle sales to consumers who otherwise could not obtain financing. Moreover, the company has continued to diversify its funding sources over time. While it faces high regulatory scrutiny like other subprime auto lenders, its performance has not been materially impacted so far because of this.
Credit Acceptance generates strong returns by maintaining a high spread between collection rates and average advance rates to dealers. While the spread has declined over the past few years because of increasing competition, the company has been able to maintain expense and pricing discipline to offset this pressure.
What Can Lead to a Rating Upgrade?
Credit Acceptance’s ratings could be upgraded if it can maintain its competitive position in the subprime auto lending market, continue to demonstrate stable asset quality mainly with respect to its growing purchased loan program and maintain debt to equity below 2.5 times after adjusting for the impact of CECL.
What Can Trigger a Ratings Downgrade?
The company’s ratings could be downgraded if its asset quality deteriorates, its debt to equity on an adjusted basis increases beyond 2.5 times or if its profitability falls below 6.5%.
Shares of Credit Acceptance have gained 12.4% so far this year compared with 32.9% growth of the industry it belongs to.
Currently, the stock carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earlier this month, SLM Corporation’s SLM long-term senior unsecured rating witnessed an upgrade from Ba2 to Ba1 by the Moody's. It also affirmed the ratings of First Horizon National Corporation FHN and its bank subsidiary, First Horizon Bank.
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