Carvana to attempt restructuring of $9bn debt load

Carvana, the online used auto retailer, is trying to drum up support from its creditors for a restructuring of its $9bn debt load as it attempts to stay afloat at a time of declining vehicle sales.

The restructuring is the latest attempt to put Carvana on a surer footing after breakneck growth and soaring sales during the coronavirus pandemic were cut short by rising interest rates and a decrease in demand.

If fully subscribed, the exchange offer to existing creditors would reduce the face value of its outstanding $5.7bn of unsecured bond debt by $1.3bn and its annual cash interest bill by roughly $100mn.

Carvana’s market capitalisation soared to nearly $50bn in 2021 after customers flush with stimulus cash flocked to its website and vending machines when a global chip shortage and supply chain problems had resulted in a dearth of new vehicles. It sold 425,000 cars that year, up from 245,000 in 2020.

But heavy spending on growth initiatives meant that by 2022 it was ill prepared for rising interest rates. It recorded its first decline in sales, which slipped to 412,000 vehicles last year. Its market value now stands at less than $2bn while its bonds trade between 40 cents and 55 cents on the dollar.

The terms of the transaction launched on Wednesday offered between 63 cents and 81 cents on the dollar to holders of five tranches of outstanding bonds maturing between 2025 and 2030. If fully subscribed, $1bn of secured bonds would replace $1.3bn of unsecured debt.

The bondholders would have a second priority claim, behind lender Ally Financial, on vehicle inventory and intellectual property including Carvana’s brand. The bonds would mature in 2028 and carry a cash interest rate of 9 per cent per annum, versus 5 per cent and 10 per cent for the existing bonds. The company could also elect to pay up to 12 per cent interest under a “payment in kind” arrangement.

The Financial Times has previously reported that at least six prominent credit investment firms have joined forces to negotiate with Carvana. According to a person familiar with the situation, there has not been much interaction between the company and its bondholders.

One prominent member of the group, Apollo Global Management, which had bought $800mn in bonds issued by Carvana in 2022 at par, would take a significant loss should it decide to participate in the restructuring.

Participation is voluntary and Carvana said that for the deal to close, at least $500mn of new debt will have to be issued. The kind of restructuring the company is proposing can often serve as a prelude to the renegotiation terms or an entirely different agreement.

Carvana released preliminary first-quarter results alongside the terms of the exchange, which showed that a cost-cutting plan — including a reduction in headcount from 21,000 to 17,000 over the past year — is starting to bear fruit.

The results also showed that sales volumes dropped by as much as 28 per cent during the first three months of the year compared with the same period of 2022 but that the company’s closely watched gross profit per unit jumped to between $4,100 and $4,400 versus $3,000 in the year-ago quarter. Shares jumped 18 per cent in early trade.

In January, chief executive Ernest Garcia told analysts the cost-cutting was resulting in a “more efficient company” and said it was not planning to raise cash by issuing additional debt.

However, on Wednesday Carvana designated its auction division, Adesa, as a so-called unrestricted subsidiary, a legal manoeuvre that leaves bondholders without a direct claim to the business while potentially paving the way for Carvana to raise new secured debt.

The move is often unpopular with debtholders, although some credit analysts had predicted Carvana would make it because it has the legal flexibility to do so.

At the end of 2022, Carvana had $400mn of cash and the ability to raise more than $3bn through credit lines and real estate that has not been pledged as collateral.