Online used car lender Carvana gets an AAA on inaugural ABS

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Carvana, the online used-car lender spun out of DriveTime Automotive Group in 2014, is making its first trip the securitization market.

While DriveTime is known as a deep subprime lender, Carvana's targets customers with a broader range of credit and income. The company was initially launched in Atlanta, Georgia, and now operating in 102 U.S. markets.

The transaction, Carvana Auto Receivables Trust 2019-1, is expected to be collateralized by approximately $350 million of fixed-rate installment loans to both prime and subprime borrowers with a weighted average FICO score (excluding borrowers with no FICO) of 635. The loans have an average current principal balance of $17,998, weighted average interest rate of 13.47%, and weighted average original term and remaining term of 70 and 69 months, respectively. The collateral is 100% used vehicles.

While the credit quality of the collateral is higher than that of DriveTime’s asset-backeds, there is very limited historical performance data. Carvana only began originating loans in February 2013, and it not originate sizable volumes for Kroll to perform representative static pool analysis until 2016. So the rating agency had used proxy data from comparable auto loan originations.

It still feels comfortable assigning an AAA to the senior tranches of Carvana’s inaugural deal, though the online lender is paying up for the privilege, with credit enhancement of 50.3%. That’s over 10 percentage points south of the 61.3% credit enhancement on the AAA rated notes issued in DriveTime’s most recent deep subprime deal. But it’s substantially higher than credit enhancement on the AAA rated notes of prime lenders with established securitization platforms. For example, CarMax only had to offer 7.9% credit enhancement on the senior tranche of its most recent used-car loan securitization.

In total, CART 2019-1 will issue seven classes of term notes with ratings ranging from AAA though BB totaling $338.8 million. (A Class A-1 money market tranche is rated K1+, Kroll’s highest short-term credit rating. Even in a “stressed scenario,” Kroll expects them to be repaid in less than 13 months.)

Carvana currently has multiple sources of liquidity, according to Kroll. The company mainly funds its originations by selling receivables to third-party purchasers, including Ally Bank and Ally Financial. In November 2018, Ally extended its commitments to fund up to an additional $1.6 billion and upsized the floorplan line from $350 million to $650 million for an additional two years.

And Carvana issued $350 million in senior unsecured debt in September 2018. Additionally, the company facilitated two private term financings involving Carvana originated loans in 2018.

Carvana’s website allows borrowers to select an exact down payment, monthly payment and loan term and quickly obtain a financing decision. Financing decisions and terms are determined by the company’s proprietary scoring and loan structuring model. Carvana acquires a substantial majority of their used-vehicle inventory though the national used-car market. Carvana assesses vehicles based on quality, inventory fit, consumer desirability, relative value, expected reconditioning costs and vehicle location. Vehicle prices are determined by a centralized pricing model and the Company does not negotiate the vehicle sales price with its customers.

Carvana’s online sales channels and low-cost “vending machine” distribution method provides lower operating costs compared to traditional retail auto finance companies. As a result, it is generally able to sell vehicles below Kelley Blue Book value. This lower markup and required customer down payment results in lower loan-to-value ratios and higher recovery amounts than traditional indirect finance companies, according to Kroll. The weighted average LTV of the CRVNA 2019-1 pool is 98.89% versus over 125% for many other indirect finance companies.

Given the lower LTV of the pool and historic recovery rates, KBRA assumed a 45% recovery rate for the transaction.

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