Carvana considers options for debt restructuring as losses mount

As plunging used car prices and the company's swift cash burn threaten its future solvency, the company is consulting with lawyers and investment bankers about options for managing its debt load.

The online car seller has spoken with advisers at Kirkland Ellis and Moelis Co., who asked not to be identified as talking about confidential discussions, according to people with knowledge of the matter. Carvana is considering possible solutions, while some of its largest creditors are banding together to negotiate as a bloc with the company.

A cooperation agreement was signed by a number of funds, including Pacific Investment Management Co. and Apollo Global Management Inc. The holders have about $4 billion of Carvana's unsecured debt, or about 70% of the total outstanding, and the pact will last a minimum of three months.

Carvana's bonds have fallen below 45 cents on the dollar and have been at distressed levels for months, indicating that investors believe there is a high chance that the company will default. Since it went public, the company has had net losses every quarter, and its cash flow has been negative for every quarter except one.

Tempe, Arizona-based Carvana has seen its stock plunge about 98% this year because of investor concerns about its long-term prospects. The company's shares fell more than 40% to $3.91 on Wednesday after Bloomberg reported on the creditor agreement.

Few companies benefited as much from the Pandemic economy as much as Carvana. When Covid fears shutting down car dealerships around the country in 2020, consumers can choose a vehicle from Carvana and have it delivered to their doorstep. The company's shares increased by 160% that year.

Car prices have fallen this year, hurting Carvana's margins, while rising interest rates increase the cost of a car for consumers financing their purchases. Carvana said last month it was cutting about 1,500 jobs, or 8% of its workforce, because of the brutal math of its industry.

Seth Basham, equity analyst at Wedbush, slashed his 12 month forecast for Carvana's share price to $1.

The developments indicate a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario or highly diluted in a best case, Basham wrote in a note to clients.

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