DBRS Morningstar Finalizes Provisional Ratings on Carvana Auto Receivables Trust 2023-N3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Carvana Auto Receivables Trust 2023-N3 (the Issuer) as follows:

--$143,374,000 at AAA (sf)
--$36,590,000 at AA (high) (sf)
--32,857,000 at A (high) (sf)
--38,084,000 at BBB (high) (sf)
--31,661,000 at BB (high) (sf)

CREDIT RATING RATIONALE/DESCRIPTION

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 has 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 37,000 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 September 3, 2023 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 574, WA annual percentage rate of 21.95%, and WA loan-to-value ratio of 101.83%. Approximately 42.66%, 33.31%, and 24.03% 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, 0.82% of the collateral balance is composed of obligors with FICO scores greater than 750, 34.17% consists of FICO scores between 601 to 750, and 65.01% 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 2023-N3 pool.

(6) The DBRS Morningstar CNL assumption is 15.15% 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: June 2023 Update,” published on June 30, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

(7) Carvana’s financial condition as reported in its annual report on Form 10-K filed as of February 23, 2023.

(8) The legal structure and presence of legal opinions, which will 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 53.25% of initial hard credit enhancement provided by the subordinated notes in the pool (46.60%), the reserve account (1.25%), and OC (5.40%). The ratings on the Class B, C, D, and E Notes reflect 41.00%, 30.00%, 17.25%, and 6.65% of initial hard credit enhancement, respectively. Additional credit support may be provided from excess spread available in the structure.

DBRS Morningstar’s credit rating on the securities referenced herein addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Accrued Note Interest and the related Note Balance.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

The principal methodology applicable to the credit rating is Rating U.S. Retail Auto Loan Securitizations (May 9, 2023; https://www.dbrsmorningstar.com/research/413731)

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

DBRS, Inc.
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New York, NY 10005 USA
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessment for U.S. ABS Servicers (July 20, 2023) https://www.dbrsmorningstar.com/research/417415/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (July 20, 2023) https://www.dbrsmorningstar.com/research/417416/operational-risk-assessment-for-us-abs-originators

Rating U.S. Structured Finance Transactions (February 6, 2023) https://www.dbrsmorningstar.com/research/409449/rating-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022) https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].