DBRS Morningstar Finalizes Provisional Ratings on American Credit Acceptance Receivables Trust 2020-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by American Credit Acceptance Receivables Trust 2020-3 (ACAR 2020-3 or the Issuer):

-- $225,740,000 Class A Notes at AAA (sf)
-- $64,080,000 Class B Notes at AA (sf)
-- $108,050,000 Class C Notes at A (sf)
-- $53,880,000 Class D Notes at BBB (sf)
-- $33,200,000 Class E Notes at BB (low) (sf)
-- $25,050,000 Class F Notes at B (sf)

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

(1) Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of OC, subordination, amounts held in the reserve account, and excess spread. Credit enhancement levels are sufficient to support the DBRS Morningstar-projected cumulative net loss (CNL) assumption under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the ratings address the payment of timely interest on a monthly basis and the payment of principal by the legal final maturity date.
-- ACAR 2020-3 provides for Class A, B, C, D, and E coverage multiples slightly below the DBRS Morningstar range of multiples set forth in the criteria for this asset class. DBRS Morningstar believes that this is warranted, given the magnitude of expected loss and structural features of the transaction.

(2) DBRS Morningstar's projected losses include the assessment of the impact of the Coronavirus Disease (COVID-19). While considerable uncertainty remains with respect to the intensity and duration of the shock, the DBRS Morningstar-projected CNL includes an assessment of the expected impact on consumer behavior. The DBRS Morningstar CNL assumption is 32.65% based on the expected cut-off date pool composition.

(3) The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: July Update,” published on July 22, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were last updated on July 22, 2020, and are reflected in DBRS Morningstar’s rating analysis. The assumptions also take into consideration observed performance during the 2008–09 financial crisis and the possible impact of the stimulus from the Coronavirus Aid, Relief, and Economic Security Act. The assumptions consider the moderate macroeconomic scenario outlined in the commentary (the moderate scenario serving as the primary anchor for current ratings). The moderate scenario assumes some success in containment of the coronavirus within Q2 2020 and a gradual relaxation of restrictions, enabling most economies to begin a gradual economic recovery in Q3 2020.

(4) The consistent operational history of American Credit Acceptance, LLC (ACA or the Company) and the strength of the overall Company and its management team.
-- The ACA senior management team has considerable experience, with an average of 19 years in banking, finance, and auto finance companies, as well as an average of approximately eight years of company tenure.

(5) ACA’s operating history and its capabilities with regard to originations, underwriting, and servicing
-- DBRS Morningstar has performed an operational review of ACA and considers the entity to be an acceptable originator and servicer of subprime automobile loan contracts.
-- ACA has completed 31 securitizations since 2011, including two transactions in 2020.
-- ACA maintains a strong corporate culture of compliance and a robust compliance department.

(6) The credit quality of the collateral and the consistent performance of ACA’s auto loan portfolio.
-- Availability of considerable historical performance data and a history of consistent performance on the ACA portfolio.
-- The statistical pool characteristics include the following: the pool is seasoned by approximately four months and contains ACA originations from Q4 2014 through Q2 2020; the weighted-average (WA) remaining term of the collateral pool is approximately 66 months; and the WA FICO score of the pool is 539.

(7) The Company indicated that it may be subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against ACA could take the form of class-action complaints by consumers; however, the Company indicated that there is no material pending or threatened litigation.

(8) The legal structure and presence of legal opinions that will address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with ACA, that the trust has a valid first-priority security interest in the assets, and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance.”

(9) ACAR 2020-3 provides for Class F Notes with an assigned rating of B (sf). While the DBRS Morningstar “Rating U.S. Retail Auto Loan Securitizations” methodology does not set forth a range of multiples for this asset class for the B (sf) level, the analytical approach for this rating level is consistent with that contemplated by the methodology. The typical range of multiples applied in the DBRS Morningstar stress analysis for a B (sf) rating is 1.00 times (x) to 1.25x.

ACA is an independent full-service automotive financing and servicing company that provides (1) financing to borrowers who do not typically have access to prime credit-lending terms for the purchase of late-model vehicles and (2) refinancing of existing automotive financing.

The ACAR 2020-3 transaction represents the 32nd securitization completed by ACA since 2011 and offers both senior and subordinate rated securities. The receivables securitized in ACAR 2020-3 are subprime automobile loan contracts secured primarily by used automobiles, light-duty trucks, vans, motorcycles, and minivans.

The rating on the Class A Notes reflects 62.75% of initial hard credit enhancement provided by the subordinated notes in the pool, the Reserve Fund (1.50%), and overcollateralization (12.45% of the total pool balance). The ratings on the Class B, Class C, Class D, Class E, and Class F Notes reflect 51.75%, 33.20%, 23.95%, 18.25%, and 13.95% of initial hard credit enhancement, respectively. Additional credit support may be provided from excess spread available in the structure.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in in U.S. dollars unless otherwise noted.

The principal methodology is Rating U.S. Retail Auto Loan Securitizations (May 13, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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