---

DCR Rates Arcadia Financial Ltd.'s $75 Million Debt Offering 'B+'

3 October 1997

DCR Rates Arcadia Financial Ltd.'s $75 Million Debt Offering 'B+'

    CHICAGO, Oct. 3 -- Duff & Phelps Credit Rating Co. (DCR) has
assigned a 'B+' (Single-B-Plus) rating to Arcadia Financial Ltd.'s
$75 million 11.50 percent senior notes due in 2007.
    DCR's long-term senior rating for Arcadia Financial Ltd. reflects some
concerns regarding the non-prime auto industry, specifically, continued heavy
competition in pricing and terms, deteriorating asset quality and declining
recovery rates.  Positively, access to the asset-backed capital markets
remains good.  Arcadia's securitization trusts historically took longer than
originally expected to reach the maximum credit enhancement reserve levels
because of higher credit losses (most notably from a discontinued segment of
the Classic Program) and to missteps in implementation of a retail disposition
program for repossessed vehicles.   The effect was reduced cash flow available
for corporate operating expenses and debt service.  Arcadia recently made
notable changes to its policies for inventory valuation and securitization
assumptions that should alleviate most of the problem.  The effect of these
adjustments, which we view positively, is a reduction in the carrying value of
repossessed vehicle inventory and of the excess servicing asset to reflect
lower future recovery values on repossessed autos, which also reduced the
potential for overstating the equity base.  The more conservative assumptions
going forward, including a 100 basis points increase in the discount rate and
a 25 basis point increase in the servicing fee used to calculate the gains,
will increase DCR's comfort level with the quality of Arcadia's earnings and
the valuation of its balance sheet in future periods.  Future performance will
depend to a great extent on the repo rate, recovery rate and used-car prices.
    Arcadia took a $64MM after-tax charge in 1Q'97, primarily to revalue its
excess servicing asset and inventory of repossessed vehicles at a 60 percent
recovery rate assumption.  The revaluation gives increased comfort with the
valuation of Arcadia's equity base; although, we are uncertain whether the
60 percent recovery rate assumption would hold up in a recession.  The Company
returned to the black with 2Q'97 net earnings of $5.7MM despite the more
conservative assumptions in its securitizations, however, net income for the
1H'97 (including the charge) was negative $70MM.  In the second quarter,
Arcadia's recovery rate on repossessed vehicles was slightly better than
estimated. Delinquencies (30+) increased at June 30, 1997 to 2.66 percent of
managed receivables from 2.64 percent at December 31, 1997 and from
1.69 percent at June 30, 1997.  DCR expects delinquencies to increase,
reflecting the change in portfolio mix to a riskier but more profitable
Classic program loan.

SOURCE  Duff & Phelps Credit Rating Co.