Carvana, the online used car retailer, is seeking support from its creditors for a restructuring of its $9 billion debt burden.
The restructuring is the latest attempt to put Carvana on a more secure footing after rapid growth and sales during the coronavirus pandemic were disrupted by rising interest rates and a slowdown in demand.
If fully subscribed, the exchange offer to existing creditors would reduce the face value of its outstanding $5.7 billion in unsecured bond debt by $1.3 billion and its annual cash interest bill by approximately $100 million.
Carvana’s market cap soared to nearly $50 billion in 2021 after customers awash with stimulus cash flocked to the site and vending machines as a global chip shortage and supply chain issues fueled a shortage had led new vehicles. 425,000 cars were sold that year, up from 245,000 in 2020.
But heavy spending on growth initiatives meant it was ill-prepared for rising interest rates into 2022. It recorded a first drop in sales, which slipped to 412,000 vehicles last year. Its market value is now less than $2 billion, while its bonds trade between 40 cents and 55 cents on the dollar.
Terms of the deal, which started Wednesday, offered holders of five tranches of outstanding bonds maturing between 2025 and 2030 between 63 cents and 81 cents on the dollar. If fully subscribed, $1 billion of secured notes would replace $1.3 billion of unsecured debt.
The bondholders would have a secondary claim to the vehicle inventory and intellectual property, including the Carvana brand, after lender Ally Financial. The bonds would mature in 2028 and carry a cash interest rate of 9 percent per annum, versus 5 percent and 10 percent for the existing bonds. The company could also choose to pay up to 12 percent interest under an “in kind” agreement.
The Financial Times previously reported that at least six well-known credit investment firms have joined forces to negotiate with Carvana. According to a person familiar with the situation, there wasn’t much interaction between the company and its bondholders.
A prominent member of the group, Apollo Global Management, which bought $800 million in bonds issued by Carvana at face value in 2022, would take a significant loss should it decide to participate in the restructuring.
Participation is voluntary, and Carvana said at least $500 million in new debt will need to be spent for the deal to close. The type of restructuring the company proposes can often serve as a prelude to renegotiating terms or an entirely different arrangement.
Carvana, along with the terms of the swap, released preliminary first-quarter results that showed a cost-cutting plan — including a headcount reduction from 21,000 to 17,000 last year — is beginning to bear fruit.
The results also showed that sales volumes for the first three months of the year were down as much as 28 percent compared to the same period in 2022, but the company’s closely watched gross profit per unit was between $4,100 and $4,400 versus $3,000 Dollar increased in 2020 year-on-year quarter. Shares were up 18 percent in early trading.
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In January, chief executive Ernest Garcia told analysts that cost cutting would result in a “more efficient company” and said it had no plans to raise cash by issuing additional debt.
On Wednesday, however, Carvana designated its auction division Adesa as a so-called unrestricted subsidiary, a legal maneuver that leaves bondholders with no direct claim to the deal while potentially paving the way for Carvana to raise new secured debt.
The move is often unpopular with creditors, though some credit analysts had predicted Carvana would pull through because it has the legal flexibility to do so.
At the end of 2022, Carvana had $400 million in cash and the ability to raise more than $3 billion through lines of credit and real estate not pledged as collateral.