July 25, 2023 — A few months ago, analysts and industry observers were convinced that used-vehicle online retailer Carvana would be forced into bankruptcy by the end of the year.
Once the darling of Wall Street with a valuation of over $50 billion in 2021, the company crashed in 2022 after tearing through more than $4 billion. The stock price cratered to just under $4 earlier this year from a high of nearly $370 in August 2021.
Simply put, the issue is that Carvana has been unable to generate a profit selling cars, primarily due to a bloated cost structure created by a high-growth strategy in its first eight years.
Used-car demand plunged in 2022, leading to losses of more than $1.6 billion and forcing the company to cut costs aggressively.
Add to the business challenges was the specter of $5.7 billion unsecured debt in three tranches, with the first set to mature in 2025. Total debt was in the $9 billion range.
In March, reports began trickling into the media that Carvana was attempting to restructure its $9 billion debt, a move S&P Global called “tantamount to default.”
Bondholders declined Carvana’s offer. But throughout the second quarter, the used car business began to improve, leading Carvana to issue guidance to Wall Street in early June that it would hit more than $50 million in EBITDA.
Its share price began climbing from a low of $3.55 in early January to over $25 in mid-June.
Set to announce its second-quarter earnings in mid-August, Carvana announced on July 18th it would move up its earnings call several weeks to July 19th last week.
Surprising the Street, Carvana announced it had reached an agreement with creditors on a debt restructuring plan that exchanges 90% of Carvana’s $5.7 billion unsecured debt set to mature in three stages beginning in 2025 through 2027 for secured debt backed by assets including its real estate (primarily gained via the Adesa acquisition) and scheduled to mature from 2028 through 2030. The bondholders agreed to take a $0.24 cut in exchange for debt secured by Carvana’s assets.
The agreement also reduces the interest Carvana has to pay on the debt by $430 million a year for the next two years, at which point the interest rates increase. But Carvana expects the restructuring to reduce its outstanding debt by $1.2 billion — not a cash paydown, but in calculating the value of the assets backing the new debt.
Carvana also announced it is selling an additional 35 million shares hoping to raise as much as $1 billion (it needs to raise $350 million from the share offer within 20 business days from when the shares are first available — which has to be within three business days of the earnings release). The Garcias — the company’s two largest shareholders — will purchase up to $126 million of the new shares.
The cash from the equity raise will be used to pay creditors approximately $324 million as part of the debt restructuring.
Carvana also reported it cut $1.1 billion of annualized expenses in the last year. It also set records in GPU and adjusted EBITDA margin of $150 million, exceeding its June guidance.
Its share price exploded more than 41% in pre-market trading the morning of the announcement and jumped to over $58 a share.
This week, it started returning to earth down to $44 but is up more than 852% year-to-date.
The deal shows Carvana’s creditors, led by Apollo Global Management, are confident the used-vehicle retailer has the chops to right the ship in the next couple of years. It also reveals two parties coming together to create what they are calling a “win-win.”
Despite the good news, Carvana is still a challenged business. It lost $105 million in the second quarter — far better than the $439 million it reported losing in the second quarter of 2022.
But for those prognosticators predicting the company’s pending bankruptcy, don’t hold your breath.