If you’ve been paying attention to the news surrounding the used car supercenter Carvana, you know that this brand might be in trouble.
Shares of Carvana’s stock fell 40% this week after this online retailer’s largest creditor signed a new deal regarding negotiations with the company that will last at least three months.
Creditors like Apollo Global Management and Pacific Investment Management currently hold roughly $4 billion of Carvana’s debt. That’s only 70% of the total outstanding debt owed by this used car supercenter.
Negotiating Creditor Agreements
In most cases, agreements with creditors like this are used as a way to complete negotiations around restructuring debt or creating new financing options. The goal is to prevent conflict among creditors. An unnamed source confirmed this new contract but made it sound like it was just another day of business.
Carvana, according to the source, believes that this dealership has too great of liquid assets available to seek bankruptcy.
Seth Basham, an analyst for Wedbush, believes that the opposite is true. According to Bashan, bankruptcy is becoming a much more likely option for Carvana. Basham went on to downgrade Carvana’s stock to underperform and reduced his target price from $9 per share to $1 per share.
For the moment, Carvana is focused on executing the profitability plan shared in its Q3 Shareholder letter. In a statement to CNBC, Carvana claims that the new deal with its creditors does not impact its goal or strategy. Carvana also wishes not to answer any questions regarding actions taken by bondholders or the recent agreement.
Based on comments by JPMorgan, Carvana is most likely working toward restructuring its debt through various bondholder negotiations. The recent agreement merely helps make that happen.
The likelihood of Carvana, under these pretenses, filing Chapter 11 is low.
Carvana Share Prices Tumble
Carvana’s share prices fell before $5 per share for the first time since the company became public in 2017. By the end of the day Weds (12/7/22), the stock closed at $3.83 per share, a 43% drop.
This drop comes a little over a year after this used car supercenter hit its all-time high. On August 10, 2021, Carvana shares traded for $376.83 per share. That means the company has seen a 97% drop in the last year. Its market cap is now $723 million, as opposed to the $60 billion cap enjoyed a year ago.
Many believe that the car shortage during the Covid-19 pandemic fueled the company’s success. As shoppers looked everywhere to purchase used vehicles, dealerships like Carvana thrived. The promise of hassle-free selling and online purchasing helped spring this company into the spotlight.
The challenge is that Carvana didn’t have the supply to meet the increased demand, which led them to buy Adesa and tons of used cars at inflated prices. Carvana had to borrow money several times to cover its losses and growth plans, which, along with various legal problems in several states, put the used car vending machine company in its position today.
Whether or not Carvana can restructure its debt and compete with local used car supercenters is yet to be seen. For many, however, this current move is just a sign that bankruptcy is becoming more realistic. Only time will tell.
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