DBRS Morningstar Finalizes Provisional Ratings to Carvana Auto Receivables Trust 2021-N1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings to the following classes of notes to be issued by Carvana Auto Receivables Trust 2021-N1 (CRVNA 2021-N1 or the Issuer):

-- $185,400,000 Class A Notes at AAA (sf)
-- $53,600,000 Class B Notes at AA (sf)
-- $58,200,000 Class C Notes at A (sf)
-- $40,400,000 Class D Notes at BBB (sf)
-- $34,400,000 Class E Notes at BB (sf)
-- $28,000,000 Class F Notes at B (sf)

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

(1) Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of overcollateralization, subordination, a fully funded reserve fund, and excess spread. Credit enhancement levels are sufficient to support the DBRS Morningstar-projected cumulative net loss (CNL) assumption under various stress scenarios.

(2) The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested. For this transaction, the ratings address the payment of timely interest on a monthly basis and principal by the legal final maturity date.

(3) The transaction parties’ capabilities with regard to originations, underwriting, and servicing.
-- DBRS Morningstar performed an operational review of Carvana, LLC (Carvana) and Bridgecrest Credit Company, LLC and considers the entities to be an acceptable originator and servicer, respectively, of auto loans.

(4) The operational history of Carvana and the strength of the overall company and its management team.
-- Company management has considerable experience in the consumer lending business.
-- Carvana’s platform is a technology-driven platform that focuses on providing the customer with high-level experience, selection, and value. Its website and smartphone app provide the consumer with vehicle search and discovery (currently showing more than 20,000 vehicles online); the ability to trade or sell vehicles almost instantaneously; and real-time, personalized financing. Carvana has developed underwriting policies and procedures for use across the lending platform that leverages technology where appropriate to validate customer identity, income, employment, residency, creditworthiness, and proper insurance coverage.
-- Carvana has developed multiple proprietary risk models to support various aspects of its vertically integrated automotive lending business. All proprietary risk models used in Carvana’s lending business are regularly monitored and tested. The risk models are updated from time to time to adjust for new performance data, changes in customer and economic trends, and additional sources of third-party data.

(5) The credit quality of the collateral, which includes Carvana-originated loans with Deal Scores of 49 or lower.
-- As of the March 7, 2021, cut-off date, the collateral pool for the transaction is primarily composed of receivables due from nonprime obligors with a weighted-average (WA) FICO score of 571 and WA annual percentage rate of 19.27% and a WA loan-to-value ratio of 101.54%. Approximately 40.59%, 33.49%, and 25.92% of the pool include loans with Carvana Deal Scores greater than or equal to 30, between 10 and 29, and between 0 and 9, respectively. Additionally, 0.13% of the pool is composed of obligors with FICO scores greater than 800, 32.67% consists of FICO scores between 601 to 800, and 67.20% is from obligors with FICO scores less than or equal to 600 or with no FICO score.
-- DBRS Morningstar analyzed the performance of Carvana’s auto loan and retail installment contract originations and static pool vintage loss data broken down by Deal Score to determine a projected CNL expectation for the CRVNA 2021-N1 pool.

(6) DBRS Morningstar's projected losses include the assessment of the impact of the Coronavirus Disease (COVID-19). While considerable uncertainty remains with respect to the intensity and duration of the shock, the DBRS Morningstar-projected CNL includes an assessment of the expected impact on consumer behavior. The DBRS Morningstar CNL assumption is 17.50% based on the cut-off date pool composition.
-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: March 2021 Update,” published on March 17, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, that have been regularly updated. The scenarios were last updated on March 17, 2021, and are reflected in DBRS Morningstar’s rating analysis. The assumptions also take into consideration observed performance during the 2008–09 financial crisis and the possible impact of stimulus. The assumptions consider the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for the current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

(7) Carvana’s financial condition as reported in its annual report on Form 10-K filed as of February 25, 2021, and 10-Q.

(8) CRVNA 2021-N1 provides for Class F Notes with an assigned rating of B (sf). While DBRS Morningstar's “Rating U.S. Retail Auto Loan Securitizations” methodology does not set forth a range of multiples for this asset class for the B (sf) level, the analytical approach for this rating level is consistent with that contemplated by the methodology. The typical range of multiples applied in the DBRS Morningstar stress analysis for a B (sf) rating is 1.00 times (x) to 1.25x.

(9) The legal structure and presence of legal opinions, which addressthe true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with Carvana, that the trust has a valid first-priority security interest in the assets, and consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance.”
-- The CRVNA 2020-N1 transaction included a repurchase obligation on each receivable if an application for title is not filed within 45 days of close or a title is not obtained within 180 days of closing. Carvana has removed the language pertaining to the time frame. As a result, there may be a percentage of the pool that may not have a title by the 180-day after close mark. The risk is mitigated by the representations made under the Receivables Purchase Agreement in which Carvana represents that each receivable will have a certificate of tile and if title isn't obtained it remains a repurchase obligation to the Seller. Also, under the Servicing Agreement, the servicer continues to represent that it will do everything as customary practice to obtain such title.

The rating on the Class A Notes reflects 54.90% of initial hard credit enhancement provided by subordinated notes in the pool (53.65%) and the reserve account (1.25%). The ratings on the Class B, C, D, E, and F Notes reflect 41.50%, 26.95%, 16.85%, 8.25%, and 1.25% of initial hard credit enhancement, respectively.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found at in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating U.S. Retail Auto Loan Securitizations (May 13, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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