New-Issuer Challenges
With months to go before it enters the ABS fray, Fair has been working to educate the market on the company’s business model and explain the new asset class. “Unlike the lease portfolios that are securitized all day long, with Fair you have a new asset class that doesn’t have a predictable cash flow because the consumers can return the car at any time,” Bauer said. “That’s where we have to work with market participants and get our model across as a flexible and dynamic cash-flow model.”
The process started last fall, when Fair had initial conversations with rating agencies. Fair has continued to meet with rating firms, offering a “really deep dive into our business model, the mechanics, the risk management, the cashflow models,” Bauer said.
Technically speaking, Fair is similar to traditional lease companies in terms of putting cars, the underlying assets, as securities into a Fair-titled trust. The only difference, Bauer explained, is that the maturity is flexible. The structures have already been put in place so, operationally, the company is ready, he said.
When it comes to analysis of a new securitizer’s credit quality, Moody’s “goes beyond who these lenders are and really dives into the controls, oversight, strength, and underlying underwriting criteria” to measure the riskiness of a transaction, Dang said. “That approach is very consistent, no matter what the business model is,” she added.
For instance, Moody’s rating of Carvana’s securitization noted the company’s lack of ABS experience, limited performance history, weak credit quality of collateral skewed toward nonprime borrowers, and declining used-vehicle prices.
KBRA pointed out that heightened regulatory scrutiny in the subprime auto lending industry is another credit challenge for Carvana.
But Fitch Ratings Senior Director Hylton Heard said online auto lending is nothing new to the industry and that while it’s picked up pace in the past few years, it accounts for a small percentage of marketshare. “I think it’ll be challenging for online auto financing to make a huge dent in the market,” Heard said, noting that Fitch did not rate Carvana’s inaugural ABS.
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