Carvana bonds rally off worst levels but cash crisis continues to spook Wall


By Emily Bary and Joy Wiltermuth

Major creditors reportedly frustrated by management and wary of ‘aggressive’ action

Carvana Co. bonds were rallying off their worst levels Friday but their deeply distressed levels continued to reflect steep concerns about a potential bankruptcy.

The used-car retailer’s most-active 10.25% coupon bonds coming due in May 2030 were trading at about a $45 price on Friday, or near 29% yield, according to BondCliQ. That compares with a price of almost $90 in June for the CCC-rated class of bonds and 12.3% yield.

Similar bonds traded at prices as low as $40 earlier in the week. Bonds priced below $70 on the dollar are widely considered on Wall Street as distressed, or a default risk that could be costly for bondholders. A look at the broader market for U.S. speculative-grade, or “junk,” bonds shows yields on debt rated CCC and lower were closer to 15% at last check, according to the ICE BofA index.

Carvana (CVNA) has been stoking increased concern given the company’s leverage and its cash needs. The company took on debt to finance the acquisition of Adesa’s U.S. physical-auction business earlier this year, a move that doesn’t sit well in the current climate, given less robust demand for used cars.

“The deterioration in liquidity was precipitated by worsening unit economics and higher interest payments, following the $3.275B debt issuance in May 2022,” to finance that deal, according to Jefferies analyst John Colantuoni. At the same time, Carvana faces “continued softness in used car demand.”

Bloomberg News reported Tuesday night that several of the company’s creditors, including big names like Apollo Global Management Inc. and Pacific Investment Management Co., have entered into a pact so that they have to act together in negotiations that would arise in the event of a bankruptcy.

See also: Carvana downgraded at Wedbush on restructuring concerns

The Wall Street Journal said Friday that Carvana’s bondholders are frustrated by the moves made by Carvana’s management team, viewed as a close-knit bunch of leaders reluctant to backtrack on initiatives. It also said the “unusual” move of the creditor pact was indicative of a belief that Carvana’s management might look to “raise cash through aggressive transactions that stripped collateral away from secured lenders.”

A report from CreditSights noted that “Carvana bonds have sold deeper into distressed territory following the company’s weak third-quarter earnings, which raises capital-raising concerns.”

Needham analyst Chris Pierce wrote Friday that while he sees more potential ways to raise cash than bears do, there are still “questions over liquidity.”

“Beyond cash inflows from inventory transactions, CVNA could attempt to monetize its real-estate assets, preferably via outright sales transactions vs sale lease-back transactions, which would increase its debt load,” Pierce wrote.

In his view, an “outright sale of real estate would be the best option given CVNA has too much capacity vs demand that it can profitably service as this time.

“Bears have maintained that CVNA doesn’t have full access to its real estate as a source of cash, but we have not seen hard evidence that this is the case,” he wrote, as he downgraded Carvana’s stock to hold from buy Friday. “Management comments indicate a higher level of freedom, creating confusing over the potential utilization of these assets.”

Jefferies’ Colantuoni wrote that his model assumes Carvana runs out of cash in the first quarter unless it gets a financial infusion.

Carvana shares capped off a tumultuous week with a bit of a whimper, rising just 1.8% in Friday trading after plunging a record 43% in Wednesday’s session and then rallying 30% in Thursday’s action. The stock is off 98% so far this year.

-Emily Bary

 

(END) Dow Jones Newswires

12-09-22 1739ET

Copyright (c) 2022 Dow Jones & Company, Inc.



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