In the volatile arena of auto finance and parts manufacturing, 2025 has emerged as a pivotal year of reckoning, marked by unprecedented turmoil that has shaken investor confidence and exposed deep-seated vulnerabilities in the sector. The dramatic bankruptcies of First Brands Group and Tricolor Holdings, both filed in late September, have not only rocked financial markets but also highlighted the perils of subprime lending, opaque debt structures, fraudulent practices, and escalating delinquencies amid economic pressures. Billions in investor capital have vanished almost overnight, with collateralized loan obligations (CLOs), asset-backed securities (ABS), and warehouse lines absorbing significant hits. These events come at a time when the broader auto finance industry is grappling with record-high subprime delinquencies, projected to persist into 2026 as inflation, high interest rates, and softening job markets continue to strain borrowers.
Meanwhile, Carvana still stands as a contrasting beacon of resilience: a company that narrowly escaped its own collapse in 2022, only to rebound with robust profitability, surging vehicle sales, and a steady stream of new ABS issuances, even as subprime delinquencies climbed to historic highs across the industry.
With over $15.4 billion in cumulative ABS issued since 2019 and approximately $6.2 billion in corporate debt outstanding, Carvana’s investors face potential losses that could echo the warning signs seen in its fallen peers, particularly if economic headwinds intensify.
This environment has amplified risks in securitized products like ABS, where pools of loans are bundled and sold to investors seeking yield. The collapses of First Brands and Tricolor serve as stark reminders that opacity, fraud, and poor risk management can transform manageable delinquencies into catastrophic losses, prompting regulators and rating agencies to demand enhanced due diligence and transparency.
Carvana: Thriving on the Edge Amid Rising Delinquencies
In sharp contrast to the dire fates of First Brands and Tricolor, Carvana, the pioneering e-commerce platform for used cars, has emerged as a survivor and innovator in the auto retail space. After a harrowing near-death experience in 2022—characterized by $1.2 billion in annual losses, a stock price plunge to $3 per share, and whispers of bankruptcy—Carvana orchestrated a remarkable turnaround through cost-cutting, debt restructurings, and operational efficiencies. The company has continued its aggressive ABS issuance program, launching a $1 billion prime deal in September (CRVNA 2025-P3) backed by high-FICO loans with a weighted average original term of 72 months and an excess spread of 6.48%. Cumulative issuances now total 32 transactions amounting to $15.4 billion since 2019, split between prime (65%, ~$10 billion across 15+ deals) and non-prime (35%, ~$5.4 billion across 17 deals).
Yet, beneath this success story, echoes of Tricolor’s subprime woes persist in Carvana’s non-prime shelf. Nearly 44% of its securitized loans fall into the subprime category, with 80% of recent non-prime ABS pools featuring weighted-average FICOs below 600. Delinquency rates have climbed to over 6% in 2025, two to three times higher than prime benchmarks, driven by persistent high interest rates, wage stagnation, and a softening labor market. Repossessions remain artificially low due to lender forbearances and extensions, but this masks underlying stress.
Cash reserves, bolstered to $1.86 billion, provide a buffer, but interest expenses remain elevated at $143 million quarterly.
However, this is what I wrote about Carvana in September 2024 – Once again, warning well in advance of a business that had all the characteristics of turning toxic all of a sudden:
What CVNA is doing is pretty obvious to me
Like in 2008 there is a strong demand for Subprime/Ninja loans, and they are riding it (buyers are mainly “private credit” and pension funds desperate for yields pick up)
1 – Draw liquidity from the short-term revolving facilities and use that to originate loans.
2 – Repackage the loans’ principal and sell them at a discount (not at “premium” as they misleadingly declare). Those who buy these loans make money off the difference between the full amount repaid and the discount they purchased
3 – Use the proceeds from the sales to repay/reload the revolving credit facilities
4 – Cash in the PIK interests loaded at the end of the customer financing loans, so they aren’t burned with interest payments till maturity, and if anything “goes wrong,” they buy time to find a fix
Needless to say, in the moment the demand for these super risky loans saturates, Carvana revenues will evaporate in the blink of an eye
Comparative Fault Lines: Opacity vs. Diversification
The comparative fault lines between First Brands Group, Tricolor Holdings, and Carvana Co. highlight stark contrasts in their operational vulnerabilities and resilience strategies, particularly around opacity versus diversification. First Brands, embroiled in a Chapter 11 restructuring bankruptcy, centered its core business on auto parts manufacturing backed by asset-based lending, amassing $11.6 billion in liabilities—including $2-4 billion in hidden debts from double-financing and off-balance-sheet fraud—which exposed investors in CLOs and BDCs to higher potential losses, with cushioned recoveries for seniors but heavy hits to juniors amid heightened scrutiny on private credit.
Carvana, however, remains an active issuer without bankruptcy, leveraging its used-car e-commerce model with a hybrid ABS program totaling $15.4 billion plus $6.2 billion in debt, where rising non-prime delinquencies at 6%+ pose risks but are mitigated by diversification, resulting in minimal market ripple and bonds trading near par despite the sector’s broader cautionary tales. Expanding on these differences, First Brands and Tricolor share a common thread of deception and inadequate oversight, where fraudulent accounting practices masked escalating risks until collapse was inevitable.
Quantifying Carvana’s Investor Exposure: A $2-3 Billion Shadow Risk (Base case)
To gauge the potential financial fallout for Carvana’s stakeholders, we must quantify exposure based on current outstanding balances, historical performance, and projected loss metrics. As of October 2025, ABS principal outstanding is estimated at approximately $12 billion, accounting for a cumulative $15.4 billion issued minus roughly 20% amortization across the 32 deals, as indicated by S&P pool performance data for select transactions showing $10.2 billion in monitored collateral. Corporate debt totals $6.18 billion, with about $5.5 billion in senior notes vulnerable in stress scenarios, assuming a 10-20% recovery haircut consistent with its B2 rating.
Breaking down ABS exposure:
- Prime Segment ($7.8 billion outstanding, 65% of total): With lower-risk borrowers and projected credit losses of 2.75%, base-case losses could total $214 million.
- Non-Prime Segment ($4.2 billion, 35%): Higher vulnerability here, with delinquency-adjusted credit losses at 12% (2-3x prime levels), yielding $504 million in potential losses. Factors include underwater loans and rising repossessions.
- Total ABS Losses: $718 million in a low-end scenario; escalating to $2.3 billion if delinquencies reach 15% amid a recession or eroding credit enhancements.
For bonds, applying a 20% haircut to the $6.18 billion total (based on B2 recovery rates in distressed sales) results in $1.24 billion in exposure. Grand Total Potential Losses: $2-3.5 billion across ABS and bonds—a figure modest relative to Carvana’s $70 billion market capitalization but significant enough to wipe out earnings, investor sentiment, and crash the stock.
Stress Testing Carvana: What If Delinquencies Mirror Sector Crises?
To further illuminate Carvana’s vulnerabilities, consider a hypothetical stress test scenario where its delinquency rates escalate to levels akin to the crises at First Brands and Tricolor—adjusted for context. While First Brands’ issues stemmed from fraud-induced hidden losses (20-35% effective loss rate on $11.6 billion liabilities), and Tricolor’s from subprime fraud leading to 50%+ haircuts, let’s model a “severe downturn” for Carvana where non-prime delinquencies surge to 10-15%, mirroring industry highs seen in subprime cohorts.
This could arise from a recession, persistent inflation, or undetected underwriting flaws, echoing the opacity that doomed its peers. In this scenario, the total exposure jumps to $5-7 billion, potentially wiping out annual profits and necessitating equity raises or asset divestitures. Market cap could halve, or worse, echoing 2022’s stock plunge.
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