© 2024 Arizent. All rights reserved.

Carvana makes prime auto ABS debut in $420M transaction

Carvana is launching its first-ever asset-backed transaction of prime auto loans, a sign of continued credit diversification from the lender’s roots in the subprime sector.

According to presale reports from Kroll Bond Rating Agency, S&P Global Ratings and DBRS Morningstar, Carvana (NYSE: CVNA) is sponsoring a $420 million bond sale fully secured primarily by prime-quality auto loans from borrowers with a weighted average FICO of 710.

That compares to a range of 554 to 635 for Carvana’s three most recent transactions that centered on loans to riskier borrowers. Whereas about 77% of the loan balances for contracts assigned to Carvana Auto Receivables Trust 2020-P1 were underwritten to borrowers with FICOs above 650, only 8% met that criteria for the subprime Carvana Auto Receivables Trust 2020-N1 deal that priced in March. Other Carvana ABS deals typically had only between 25%-29% of borrowers with FICOs exceeding 701.

ASR031518-Carvana
Vehicles sit parked outside the Carvana Co. car vending machine in Frisco, Texas, U.S., on Thursday, June 8, 2017. The U.S. automotive industry may be struggling with an array of concerns ranging from sliding used-car prices to rising inventories, but they do not faze the co-founder and chief executive officer of Carvana Co., an online dealer for used cars. Photographer: Laura Buckman/Bloomberg

Carvana, which spun off from DriveTime Automotive Group in 2014, maintains business relationships with that subprime lender. But Carvana has increasingly targeted a wider range of prime borrowers looking for a fully online auto buying model, including purchase, finance and delivery, according to Kroll.

Through a forward-flow purchase arrangement with Ally Bank, Arizona-based Carvana had previously sold off between 40%-50% of its prime originations to Ally while dispersing the rest through Carvana’s five previous securitizations (Carvana launched its ABS platform in 2019).

“Ally has purchased Carvana loans in bulk sales throughout 2020; however, Carvana has not sold loans to Ally so far in Q4 2020 in order to accumulate the pool at hand,” according to Kroll's report. (Ally will continue purchasing Carvana loans after the closing of the Carvana 2020-P1 transaction).

All Carvana’s loans are serviced By Bridgecrest Credit Co., an affiliate of Drivetime.

Carvana’s fast growth in 2020 has been fueled by a surge in car buyers who increasingly turned to online used-vehicle shopping as the coronavirus pandemic deterred traffic into physical auto dealerships. The loans in the pool have an average of just one-month seasoning, with weighted average remaining terms of 68 months. The average balances of $19,901 carry average APR terms of 8.2%.

The publicly traded company (NYSA: CVNA) reported its first quarterly earnings profit in the third quarter. (The company had net losses of $254.7 million in 2018 and $364.6 million in 2019, and $307.6 million in the first nine months of 2020 it invests in market expansion and infrastructure costs, including its signature “vending machine” distribution centers).

The transaction will include eight classes of notes, including three term-note tranches totaling $311 million with preliminary AAA notes from Kroll and DBRS Morningstar. A $56 million money-market tranche bearing Kroll’s highest short-term rating of K1+ and an R-1 from DBRS Morningstar.

The senior notes carry 9.9% credit enhancement of the pool with $450 million in oustanding loan balances, compared to 58.35% in Carvana's deal earlier this year.

Kroll has projected an estimated loss range of between 1.1%-3.1%. DBRS Morningstar has an expected loss of 2.75%. of the collateral pool.

For reprint and licensing requests for this article, click here.
Prime auto ABS ABS Auto ABS
MORE FROM ASSET SECURITIZATION REPORT