Rising interest rates and wider credit spreads are putting the squeeze on Carvana’s financing business, even as origination volume and sales ticked up in the second quarter.
Carvana’s origination volume increased 6.1% year over year in Q2 to $1.98 billion but was flat with Q1 as the retailer’s sales improved. Retail sales were up 9% YoY to 117,564 units.
Other gross profit per unit (GPU), which includes finance revenue, clocked in at $1,854, down 27.3% YoY but up 2.6% sequentially. Linked-quarter changes were largely driven by higher consumer rates relative to benchmark interest rates, and partially offset by wider credit spreads and a change in loan sales channel mix, Chief Financial Officer Mark Jenkins said on the company’s Thursday earnings call.
YoY changes in other GPU were driven by several factors, according to the shareholder letter, including higher benchmark interest rates at the time of loan sale relative to origination interest rates, wider credit spreads and a change in loan sales channel mix, partially offset by the impact of higher car prices on average loan size.
“Obviously, there’s been a lot more noise I think across financial markets over the last many months than there has been in quite some time,” Chief Executive Ernie Garcia, III, said on the call. “The form that basically takes is it increases volatility in a process like securitization.”
Instead, Carvana elected to sell its loans to Ally Financial — with which it has a $5 billion purchase agreement — a process the retailer leaned on during the height of the pandemic, Garcia said.
“Several weeks ago, the [asset-backed securities] markets were in rougher shape. I think the last couple of weeks have been very good in the ABS market, so we’ll continue to monitor those markets and try to make the best decision that we possibly can,” he said, noting that the company’s baseline expectation is to “continue to lean more in the direction of pooled loan sales.”
‘Two-channel strategy’ for monetizing loans
Looking toward Q3, the company expects to sell loans in the whole loan sales format but will maintain flexibility to optimize its channel mix as the quarter progresses, Jenkins said.
“We have a two-channel strategy for monetizing our loans,” Jenkins said. “We use the securitization market, and then we sell loans through whole loan sales or forward flow agreements. The way we think about that two-channel strategy is that it balances economics and stability … typically in the securitization market you see better monetization, but the securitization market involves more variability. And so, the forward flow and whole loan sales typically have lower monetization but add a degree of stability.”
Finance receivables held for sale clocked in at $393 million, up from $356 million at yearend 2021, according to the shareholder letter. Carvana had $3.2 billion of capacity remaining on its line with Ally, Jenkins said.
As of June 30, Carvana had approximately $4.7 billion in total liquidity resources, including $2.7 billion in cash and revolving availability and $2.1 billion of real estate and other assets, including approximately $1 billion of real estate acquired with ADESA, Jenkins said.
Used-vehicle affordability concerns and the rising rate environment are impacting consumers’ ability to finance with Carvana, according to the shareholder letter. The company estimates that F&I attachment rates will increase relative to Q2 as used-vehicle prices continue to normalize.
Carvana also announced yesterday that it had launched an option for consumers in South Carolina to add a co-signer to their loan to allow for lower down payments, lower rates and lower monthly payments. Consumers can add a co-signer on the company’s website and app to view rates with and without a co-signer without a hard credit pull, according to a company release.
Carvana also on May 9 closed its $2.2 billion acquisition of KAR Global’s Adesa U.S. auction business. As of Aug. 4, Carvana had embedded market hubs at 18 ADESA locations and began landing over half the cars it buys from consumers that it plans to sell wholesale at ADESA sights, according to the shareholder letter.
The ADESA acquisition has also been a driver in deepening the automotive retailer’s relationship with Hertz, Garcia said. Hertz has unloaded a portion of its aged fleet through Carvana’s pipeline.
Shares of Carvana [NYSE: CVNA] were trading at $47.40 as of 3:01 p.m. ET today, up 36.6% from market open. Carvana has a market capitalization of $8.4 billion.