Research: Rating Action: Moody’s Assigns Draft Ratings to Credit Acceptance Auto Loan Trust Notes 2022-3

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New York, October 24, 2022 — Moody’s Investors Service (“Moody’s”) has assigned provisional ratings to notes to be issued by Credit Acceptance Auto Loan Trust 2022-3 (CAALT 2022-3). This is the second non-preferred auto loan securitization sponsored by Credit Acceptance Corporation (CAC; Ba3 stable) this year. The loans are backed by collections on lower quality auto installment loan contracts issued by CAC, which is also the manager and administrator of the transaction.

The full rating actions are as follows:

Issuer: Credit Acceptance Auto Loan Trust 2022-3

Category A tickets, assigned (P)Aaa (sf)

Category B tickets, assigned (P)Aaa (sf)

Category C tickets, assigned (P)Aa3 (sf)

Category D tickets, assigned (P)Baa2 (sf)

RATINGS RATIONALE

Ratings are based on the quality of the underlying collateral and its expected performance, the strength of the capital structure and CAC’s experience and expertise as manager and administrator.

Moody’s median cumulative net loss expectation for the principal balance of retail contracts is 27% and loss under Aaa stress is 66%. Moody’s based its cumulative net loss expectation and loss under stress Aaa on an analysis of the credit quality of the underlying collateral; historical performance of similar collateral, including securitization performance and managed portfolio performance; CAC’s ability to perform the service functions; and current expectations regarding the macroeconomic environment during the term of the transaction.

At closing, Class A Notes, Class B Notes, Class C Notes and Class D Notes are expected to benefit from 71.2%, 57.3%, 41.8% and 23.6% of firm credit enhancement, respectively. Firm credit enhancement for the Notes consists of a combination of overcollateralization, non-declining reserve account and subordination, except for Class D Notes, which do not benefit from subordination.

MAIN METHODOLOGY

The main methodology used in these ratings was “Moody’s Global Approach to Rating Auto Loan- and Lease-Backed ABS” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/390478. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of ratings:

At the top

Moody’s may upgrade the C and D category ratings if, given current expectations of portfolio losses, the levels of credit enhancement are consistent with higher ratings. In sequential payment structures, such as the one in this transaction, credit enhancement increases as a percentage of the collateral balance as collections repay senior notes. Prepayments and interest recoveries for principal repayments of the Notes will accelerate this improvement. Moody’s expectations of pool losses could decline due to fewer debtor defaults or appreciation in the value of vehicles securing a debtor’s promise to pay. Portfolio losses are also highly dependent on the US labor market, the used vehicle market and changes in maintenance practices.

Down

Moody’s may downgrade the ratings if, given current expectations of portfolio losses, levels of credit enhancement are consistent with lower ratings. The credit enhancement may decrease if the excess spread is not sufficient to cover losses in any given month. Moody’s expectations of pool losses could increase due to a higher number of debtor defaults or deterioration in the value of vehicles securing a debtor’s promise to pay. Portfolio losses are also highly dependent on the US labor market, the used vehicle market and poor maintenance. Other reasons for below-expected performance include errors on the part of trading parties, inadequate governance of transactions, and fraud.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

Further information on representations, warranties and enforcement mechanisms available to investors can be found at https://ratings.moodys.com/documents/PBS_1344376.

The analysis includes an evaluation of collateral characteristics and performance to determine expected collateral loss or a range of collateral losses or expected cash flows for rated instruments. Second, Moody’s estimates collateral losses or expected cash flows using a quantitative tool that takes into account credit enhancement, loss distribution and other structural characteristics, to derive the loss expected for each scored instrument.

Moody’s quantitative analysis involves an evaluation of scenarios that focus on factors contributing to rating sensitivity and consider the likelihood of material collateral losses or impaired cash flows. Moody’s weights the impact on rated instruments based on its assumptions of the likelihood of events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Yan Yan
Vice President – Senior Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Jing Jing Dang, CFA
Associate General Manager
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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