CACC

Business Context and Reporting Period

Credit Acceptance Corporation (Credit Acceptance) is an indirect lender providing auto loans to consumers through a nationwide network of dealer-partners. The company operates two primary programs: the Portfolio Program (advancing funds to dealers) and the Purchase Program (buying loans outright). This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine months ended on that date.

Key Financial Metrics

Liquidity: The company maintains a funded debt to equity ratio of 2.2:1. Cash flows from operating activities for the nine months ended September 30, 2008, were $110.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 31.2% for the three months and 27.8% for the nine months compared to the same periods in 2007, driven by a 37.7% increase in the average outstanding loan portfolio balance.
• Profitability: Net income increased 40.1% for the quarter and 14.6% year-to-date. Income from continuing operations grew 50.9% for the quarter.
• Credit Losses: The provision for credit losses increased significantly, up 41.3% for the quarter and 133.7% year-to-date. This was primarily due to a modification of the forecasting methodology in Q2 2008, which assumed loans originated in 2006-2008 would perform 100 to 300 basis points worse than historical loans.
• Loan Portfolio Composition: The Purchase Program volume increased, representing 30.8% of new loans in Q3 2008 compared to 25.5% in Q3 2007.
• Dealer Network: Active dealer-partners increased 16.2% to 2,270, and consumer loan unit volume grew 26.9%.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Management targets a 10% reduction in year-over-year consumer loan unit volume for Q4 2008 due to capital constraints.
• For 2009, growth targets depend on securing additional financing. If no additional capital is obtained, the company expects to target unit volumes approximately 10% lower than the prior year.
• Financing Maturities: A $325 million warehouse facility and a $50 million residual credit facility mature in August 2009. If these are not renewed or replaced, loan origination volumes must be reduced further (estimated at $550 million for 2009 vs. $600 million if renewed).

Risks and Contingencies:

• Capital Access: The company faces significant risk regarding the renewal of maturing debt facilities in August 2009 given current credit market conditions.
• Forecasting Accuracy: Results are highly sensitive to the accuracy of future collection forecasts. A 100 basis point change in collection rates impacts after-tax return on capital by approximately 30 basis points for Dealer Loans and 65 basis points for Purchased Loans.
• Economic Conditions: Deteriorating economic conditions could further reduce collection rates and used vehicle values, impacting recoveries.

Investor Verification Checklist

• Debt Renewal Status: Verify the status of negotiations for the $325 million warehouse facility and $50 million residual credit facility maturing in August 2009.
• Collection Performance: Monitor actual collection rates for 2007 and 2008 originations against the revised forecasts (68.2% for 2007 and 2008 loans as of Sep 30, 2008).
• Provision Trends: Track the provision for credit losses to ensure the Q2 2008 methodology adjustment was sufficient to cover actual losses.
• Liquidity Position: Review the ratio of restricted cash to total debt and the availability under the revolving line of credit ($70.5 million available as of Sep 30, 2008).
• Dealer Attrition: Assess dealer attrition rates (20.6% in Q3 2008) and the impact of new dealer onboarding on portfolio quality.