Carvana, the troubled used-car retailer, has received a lifeline with a deal that has sent its shares soaring by as much as 36% during morning trading. The agreement, struck with a group that includes private-equity firm Apollo, will reduce Carvana’s outstanding debt by over $1 billion, offering some relief to the company as it grapples with liquidity issues caused by a slump in demand for used cars. Apollo’s Deputy CIO of Credit, John Zito, expressed his satisfaction with the debt exchange agreement, noting that it will significantly strengthen Carvana’s financial position while benefiting its creditors with new first lien debt.
During the COVID-19 pandemic, Carvana experienced a surge in popularity as consumers turned to readily available used cars instead of newer vehicles that were in short supply due to the global chip shortage. However, the company has faced challenges in selling cars acquired at elevated prices, as buyers, impacted by inflation and recession concerns, have been cutting back on spending. Consequently, Carvana’s shares have plummeted by 87% over the past two years, leading to a considerable decline in market capitalization from $60 billion in 2021 to its current value of $7.5 billion.
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To improve its financial position and achieve positive cash flow, Carvana has implemented several measures, including reducing inventory and cutting advertising expenses. Additionally, the company announced plans to raise up to $1 billion through a stock sale. Pre-market trading indicated a significant rise in Carvana’s shares, reaching as high as $57, which some traders attributed to a short squeeze. Approximately 54% of Carvana’s publicly available shares were being shorted as of July 18, according to estimates from analytics firm Ortex. A short squeeze can occur when short-sellers are forced to buy back shares to avoid losses if the stock price rises sharply.
Despite concerns about Carvana’s financial health due to declining vehicle demand and a $2.2 billion debt-funded deal to acquire auto auction house Adesa, the recent debt agreement is expected to alleviate some of the pressures. The deal will eliminate more than 83% of Carvana’s unsecured notes maturing in 2025 and 2027 and will reduce the required cash interest expense by over $430 million per year for the next two years. In addition, the noteholders will receive new notes secured by Carvana and Adesa assets. The company’s second-quarter net loss narrowed to $58 million, or 55 cents per class A share, from $238 million, or $2.35 per class A share, in the previous year. Analysts had anticipated a loss of $1.15 per share, making the company’s financial performance better than expected.
