Online used car retailer Carvana is pumping the brakes on borrowing via securitisation, a market that has played a key role in its funding strategy since 2018.
The once high-flying company will instead rely on selling its loans in a "whole loan sale format" in the third quarter to fuel its business, Carvana CFO Mark Jenkins told analysts on its second-quarter earnings call on August 4. The shift in strategy comes as asset-backed investors have cooled on buying new paper from the Tempe, Arizona-based company.
Registration delays, falling used car prices and a rocky capital raise for its acquisition of car auctioneer Adesa have knocked Carvana off course this year. At the same time, the economy is showing fatigue as auto loan delinquencies and defaults have been creeping up from last year’s historic lows.
“The market is not open to them," a portfolio manager said, "they are getting hit on aspects of their business.”
Carvana posted a net loss in the second quarter as it earned less from cars it sold. The gross profit per vehicle tumbled to US$3,368 from US$5,120 in the same quarter in 2021 due to higher interest costs and expenses to touch up the cars for resale.
Carvana's pause from securitisation is a sharp turn for the company known for its automated car vending towers. Just a year ago, its securitisation programme went into hyper-drive along with its car sales. It printed two deals – one for prime loans and the other for subprime – per quarter up until the first quarter of this year. It has not made a trip to the ABS market since pricing a US$616m prime deal in May. Another securitisation is not on the horizon.
“As we laid out in Q3, our current expectation is we'll be selling loans in a whole loan sale format, but we'll continue to evaluate as the quarter progresses,” Carvana’s Jenkins said on the call.
While the ABS market offers “better monetisation” but is more volatile, whole loan sales have “lower monetisation but add a degree of stability”, he said.
Carvana has a US$5bn loan purchase agreement with Ally Financial, which can still buy up to US$3.2bn in loans from the car dealer.
A company spokesperson declined to comment when asked under what market conditions Carvana would restart its securitisation programme.
Funding terms for auto ABS issuers are less favourable now than at the start of year, though they have improved in recent weeks, which has enticed some to come to market.
Current spreads are still wide enough to draw investors, even to car-related deals. “There are a lot of buyers who want to put their money to work,” a senior ABS banker said.
Yield-hungry fund managers flocked to the latest offerings from Toyota and General Motors, which enlarged their deals to meet the strong demand.