Carvana’s debt restructuring is good news, but its losses are ‘hardly in the growth stock handbook,’ analyst says

“The strong performance of our business in 2023 presented an opportunity for an impactful and win-win transaction for Carvana and its senior unsecured noteholders,” Chief Financial Officer Mark Jenkins said in a release.

“This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and lowering near-term cash interest expense as we continue to execute our plan of driving significant profitability and returning to growth.”

For more, see: Carvana’s stock rockets as debt deal is expected to ‘meaningfully improve’ liquidity

The deal “should meaningfully improve” Carvana’s liquidity position, Baird analyst Colin Sebastian wrote in a note to clients.

“The news was obviously good and qualifies as a “win-win” as the management team pitched on the earning call,” agreed Glenn Reynolds, founder and editor of Macro4Micro, and founder and former CEO of research firm CreditSights.

As the chart below from research company BondCliQ Media Solutions shows, the company’s most active bonds have seen net buying over the last 10 days.

Carvana has the backing of key creditor Apollo Global Management Inc.
APO,
-0.58%,
as well as PIMCO, Ares and an ad-hoc group of noteholders, according to the release. That group represents more than 90% of the company’s senior unsecured notes, or about $5.2 billion.

The company is offering new notes in the exchange that are secured by Carvana and ADESA assets. Carvana acquired ADESA, another online car seller, in May of 2022 for $2.2 billion. The deal gave it access to 56 U.S. locations with about 6.5 million sq. feet of buildings on more than 4,000 acres.

Carvana had built a massive debt load during the pandemic when demand for used cars was red hot. But demand has slowed more recently as interest rates have climbed and consumers have become more cautious about spending in a high-inflation environment.

Carvana also reported second-quarter earnings that topped analyst estimates, even as it chalked up another loss. In a filing with the Securities and Exchange Commission, the company said it plans to raise up to $1 billion by selling up to 35 million shares, via an at-the-market offering.

Reynolds from Macro4Micro said issuing stock is “intrinsically positive.”

“They can pitch equity investors on the lower financial risk inherent in less total debt and lower cash interest requirements,” he said.

Bondholders now have the benefit of a well-organized group that have the clout to buy the entire company in a later debt restructuring, if this one fails in a downturn, he said.

“The deal brings more structural seniority with the newly pledged assets in the exchange, and that makes bondholders as a group control more of the capital structure and more key assets,” he said.

But it’s not all good news.

“On a three-quarter bottle empty note, CVNA needs to pitch a growth stock valuation for a company that just saw a 35% decline in unit sales, a decline in dollar sales, a negative last 12-month EBITDA before interest and capex, a bottom line net loss, a downsized base of inventory, a stalled advertising budget, and slashed capex budget that will slow their ability to grow their footprint,” said Reynolds.

That’s hardly in the “growth stock playbook” though the management salesmanship is excellent, he said.

“The multiple on their equity comes down to what future year the sell-side keys in on (2026?) and what excessive multiples they make up. The reality is they will get the deal done, issue stock, and live to fight another day.”

Carvana stock rallied 28% on the news. The stock, which has been part of the group called meme stocks that are favored by a group of traders on a Reddit group, has gained a startling 972% in the year to date, while the S&P 500
SPX,
+0.22%
has gained 19%.

See also: Carvana stock clipped by call to sell by J.P. Morgan