DBRS Morningstar Finalizes Provisional Ratings to Carvana Auto Receivables Trust 2021-N3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings to the following classes of notes issued by Carvana Auto Receivables Trust 2021-N3 (CRVNA 2021-N3 or the Issuer):

-- $154,340,000 Class A-1 Notes at AAA (sf)
-- $57,130,000 Class A-2 Notes at AAA (sf)
-- $56,490,000 Class B Notes at AA (sf)
-- $53,340,000 Class C Notes at A (high) (sf)
-- $52,500,000 Class D Notes at BBB (high) (sf)
-- $46,200,000 Class E Notes at BB (sf)
-- $18,900,000 Class N Notes at BB (low) (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 30,000 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 August 21, 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 579 and WA annual percentage rate of 18.60% and a WA loan-to-value ratio of 101.10%. Approximately 45.55%, 29.41%, and 25.04% 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, 0.98% of the collateral balance is composed of obligors with FICO scores greater than 750, 33.44% consists of FICO scores between 601 to 750, and 65.57% 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-N3 pool.

(6) The DBRS Morningstar CNL assumption is 15.80% based on the cut-off date pool composition.
-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns,” published on September 8, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect the view that, although COVID-19 remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Current median forecasts considered in the baseline macroeconomic scenarios incorporate some risks associated with further outbreaks, but remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to COVID-19 may nonetheless bring other risks to the forefront in coming months and years.

(7) Carvana’s financial condition as reported in its annual report on Form 10-K filed as of February 25, 2021, and 10-Q filed as of August 5, 2021.

(8) The legal structure and presence of legal opinions, which address the 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 rating on the Class A Notes reflects 50.90% of initial hard credit enhancement provided by subordinated notes in the pool (49.65%) and the reserve account (1.25%). The ratings on the Class B, C, D, and E Notes reflect 37.45%, 24.75%, 12.25%, 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 10, 2021), 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 release: https://www.dbrsmorningstar.com/research/358308)

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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