Credit Acceptance Announces Completion of $500.0 Million Asset-Backed Financing

Rhea-AI Summary

Credit Acceptance (CACC) announced a $500.0 million asset-backed non-recourse secured financing, conveying loans valued at $625.2 million to a special purpose entity. The Financing includes three classes of notes with varying interest rates, an expected average annualized cost of 6.4%, and will be used for debt repayment and general corporate purposes.

Insights

Financial Analyst

The completion of a $500 million asset-backed non-recourse secured financing by Credit Acceptance Corporation signifies a strategic move to bolster liquidity and manage debt obligations. This type of financing, by transferring loans to a special purpose entity and subsequently to a trust for note issuance, is a common method used by companies to secure funding without impacting their balance sheets directly. The issuance of three classes of notes with varying average lives and interest rates reflects a tiered approach to investment risk and return, catering to different investor appetites.

From a financial perspective, the expected average annualized cost of 6.4% is a critical figure as it directly impacts the company's cost of capital. Investors will assess this against prevailing market rates and the company's creditworthiness. The allocation of cash flows, with 4% covering servicing expenses and the majority servicing debt, appears to be a balanced approach to managing the new capital. However, the impact on the company's future interest expenses and net income will depend on how effectively this capital is deployed for growth or debt reduction.

It's also noteworthy that the financing is structured to preserve dealer relationships and their rights to future payments, which is vital for maintaining the company's sales network and, by extension, its revenue-generating capability. The non-registration of the notes indicates a private placement, which is typically targeted at sophisticated investors and may carry different regulatory implications than public offerings.

Market Research Analyst

The auto financing sector is highly competitive and Credit Acceptance's recent financing transaction may influence its market position. By securing additional capital, the company is likely to sustain its competitive edge in providing financing solutions to consumers with diverse credit histories. This move may also reassure investors about the company's financial robustness and its ability to manage cash flows effectively.

It's essential to contextualize the company's actions within the broader industry trends, such as interest rate fluctuations and credit risk. The specified interest rates for the notes may reflect the current economic environment and the risk profile of the underlying consumer loans. If the rates are favorable compared to industry averages, it may indicate strong market demand for such financial instruments and Credit Acceptance's solid standing among its peers.

Moreover, the emphasis on not affecting contractual relationships with dealers indicates a commitment to stability and growth in its distribution network, which is a vital aspect for future sales and market share expansion. The ability to offer financing to consumers who might not qualify elsewhere can be a significant differentiator in the auto finance market, potentially leading to increased dealer loyalty and customer base growth.

Legal Expert

The legal intricacies of this financing transaction are notable, particularly the use of a special purpose entity to isolate financial risk and the choice to issue unregistered notes. The latter implies a strategic decision to streamline the capital-raising process, avoiding the more extensive disclosures and regulatory scrutiny associated with public offerings. Investors and analysts will be mindful of the legal frameworks governing these securities, as they may carry different rights and obligations than registered securities.

The disclosure in accordance with Rule 135c under the Securities Act of 1933 is a compliance measure indicating transparency in the company's communications with the market. This rule allows for certain announcements about unregistered securities without being deemed a prospectus or an offer to sell, which is important for maintaining legal integrity while informing potential investors.

Additionally, the structuring of the financing to protect dealer relationships and holdback rights is a proactive legal strategy to ensure business continuity and mitigate potential disputes. This may reflect a nuanced understanding of the importance of dealer networks in the auto financing industry and the legal complexities that can arise from financial restructuring.

Southfield, Michigan, March 28, 2024 (GLOBE NEWSWIRE) -- Credit Acceptance Corporation (Nasdaq: CACC) (the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) announced today the completion of a $500.0 million asset-backed non-recourse secured financing (the “Financing”).  Pursuant to this transaction, we conveyed loans having a value of approximately $625.2 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			Average Life			Price				Interest Rate
	A		$	298,175,000			2.35 years			99.98022%				5.68%
	B		$	64,412,000			2.82 years			99.99341%				6.03%
	C		$	137,413,000			3.12 years			99.97725%				6.71%

The Financing will:

• have an expected average annualized cost of approximately 6.4% including the initial purchasers’ fees and other costs;
• revolve for 24 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 on the notes 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.

The notes have not been and will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This news release does not and will not constitute an offer to sell or the solicitation of an offer to buy the notes. This news release is being issued pursuant to and in accordance with Rule 135c under the Securities Act of 1933.

Description of Credit Acceptance Corporation

We make vehicle ownership possible by providing innovative financing solutions 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.

FAQ

What was the value of the loans conveyed in the financing?

The loans conveyed in the financing had a value of approximately $625.2 million.

What are the three classes of notes issued in the Financing?

The three classes of notes issued are Note Class A, B, and C with varying interest rates and average life.

What is the expected average annualized cost of the Financing?

The expected average annualized cost of the Financing is approximately 6.4%.

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

The Financing will revolve for 24 months before amortizing based on the cash flows from the conveyed loans.

What will the cash flows from the underlying consumer loans be used for?

4.0% of the cash flows will cover servicing expenses, and the remaining 96.0% will be used to pay principal, interest on the notes, and ongoing costs of the Financing.