American Credit Acceptance Receivables Trust, 2022-4, is preparing to securitize a pool of income from lower-grade retail installment loans, raising $300 million in the capital markets.

Notes issued under the deal, known as ACAR 2022-4, will benefit from an experienced sponsor and servicing agent, according to Moody’s Investor Service, which is one of the key strengths of agreement credit.

The list of transaction challenges is a little longer, however. For one, American Credit Acceptance, the sponsor, is unrated and a financially weak managing agent, Moody’s said.

“A financially weak servicer/sponsor may be less able to mitigate non-collateral risk on behalf of ABS bondholders,” the rating agency said. “Also, if maintenance has to be transferred to the backup repairer, performance may suffer.”

Unpreferred loan quality is another challenge for the ratings, the rating agency said. The pool has a non-zero weighted average (WA) FICO score of 541. Previous ACAR transactions issued in 2021 and early 2022 showed weaker performance compared to 2020 and pre-pandemic transactions. Early performance data on more recent deals had revealed higher cumulative net losses from more recent managed portfolio creation vintages, leading to higher expected losses for the ACAR 2022-4 deal, according to the rating agency.

Almost the entire loan pool, or 99%, finances used cars. Even that could leave the pool vulnerable to a reduction in salvage costs, if used car prices drop significantly.

To mitigate many of these risk factors, the ACAR 2022-4 ratings benefit from a reserve fund, overcollateralisation, subordination and excess margin. A cash reserve provides liquidity to the Notes.

Moody’s plans to assign ratings ranging from “Aaa” on the $105.7 million Class A Notes to “Baa2” on the $39.6 million Class D Notes. The legal final maturity of the notes extends from May 2026 to January 2030.