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Credit Acceptance's Ratings and Outlook Affirmed by Moody's

Credit Acceptance Corporation’s CACC corporate family and long-term senior unsecured ratings have been affirmed at Ba3 by Moody's Investors Service. Moreover, the rating outlook is stable for the company.

Reasons Behind Affirmation

The affirmations are reflective of the company’s strength in profitability, decent capitalization levels and liquidity position. However, Moody’s believes the company's profitability might be strained in the upcoming quarters due to the pandemic-induced uncertain economic environment and elevated regulatory risk in subprime auto lending.

Credit Acceptance displays a solid capital position, with tangible equity to tangible managed assets of 28% as of Jun 30, 2020. Moody's expects the company to maintain a strong capitalization over the next 12-18 months. Also, the company has adequate liquidity with more than $800 million available under its revolver and warehouse facilities as of Jun 30, 2020.

However, the pandemic-induced economic uncertainties are major headwinds for the company. Notably, Credit Acceptance revised the expected loan portfolio cash flows by about $200 million in the first quarter of 2020. Further, it continues to be plagued with legal problems with subpoenas received from the New Jersey and Maryland Attorneys General, and a lawsuit filed by the Massachusetts Attorney General.

Also, the company’s profitability declined in the first half of 2020 from the prior-year period. This mainly resulted from the CECL introduction and the overall grim economic situation. Further, loan originations plummeted in March and April due to the lockdown measures imposed. However, the same witnessed improvement in the following months as lockdown measures were eased.

What can Trigger a Change in Moody’s Ratings?

Credit Acceptance’s ratings will likely be upgraded if the company maintains its robust position in the subprime auto lending market and shows stable asset quality. Further, increasing profitability levels and low debt to equity ratios will aid the firm.

However, the ratings could be downgraded if the profitability declines and asset quality deteriorates. Moreover, rise in debt to equity levels and fall in the share of senior unsecured debt can result in a downgrade too.

Rating Actions on Other Finance Stocks

In the past few months, Moody’s affirmed ratings and outlook for many finance sector stocks. Amid the coronavirus pandemic and the resultant economic uncertainties, the rating agency affirmed ratings and maintained stable outlooks for FirstCash FCFS, SLM Corporation SLM and ItauUnibanco Holding S.A. ITUB.

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