What happened
Shares of online used car dealer Carvana (CVNA 2.88%) were jumping double digits for the second time this week. This time the catalyst was a credit rating upgrade by S&P Global on some Carvana-sponsored securitizations.
As a result, Carvana stock was up 18.3% as of noon ET.
So what
Loan securitization is a key part of Carvana's business model as it tends to sell the auto loans it makes to customers, rather than keeping them on its books. A wave of defaults in auto loans, therefore, could be potentially devastating for Carvana, but the S&P is saying that, instead, the opposite is happening. It overestimated the losses Carvana and its partners would take on its loans, and is raising its ratings accordingly.
S&P Global Ratings raised its ratings on 21 classes from seven Carvana-sponsored securitizations backed by prime auto loans, and lowered its loss assumptions as well. It also raised its ratings and lowered loss assumptions on debt associated with non-prime auto loans.
Carvana stock is also heavily shorted, and the stock was gaining on high volume today, a sign that a short squeeze may also be pushing it higher.
Now what
The ratings upgrade is the latest sign that Carvana is lowering its risk of bankruptcy, and the stock has jumped off of rock-bottom lows at the end of 2022.
Management's efforts to cut costs paid off in the first quarter and the company is targeting an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit in the second quarter.
While there's still a lot of work to do before this is a healthy, profitable, and growing business, Carvana is moving in the right direction, and that's enough to push the stock higher.
