Carvana will attempt to restructure its $9 billion debt load

Carvana, the online used car retailer, is trying to get support from its creditors for a restructuring of its $9 billion debt load as it tries to stay afloat at a time of declining car sales.

The restructuring is the latest attempt to put Carvana on a more secure footing after breakneck growth and soaring sales during the coronavirus pandemic were interrupted 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 debt by $1[ads1].3 billion and its annual cash interest bill by approximately $100 million.

Carvana’s market value rose to nearly $50 billion in 2021 after customers flocked to stimulus that flowed to its website and vending machines as a global chip shortage and supply chain problems had resulted in a shortage of new vehicles. It sold 425,000 cars that year, up from 245,000 in 2020.

But large expenditure on growth initiatives meant that in 2022 it was ill-prepared for rising interest rates. It recorded its first decline in sales, which fell to 412,000 cars last year. The market value is now less than 2 billion dollars while the 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, $1 billion of covered bonds would replace $1.3 billion dollar unsecured debt.

The bondholders will have second priority claims, behind lender Ally Financial, on vehicle inventory and intellectual property, including Carvana’s brand. The bonds mature in 2028 and have a cash interest of 9 per cent per annum, compared to 5 per cent and 10 per cent for the existing bonds. The company can also choose to pay up to 12 percent interest under a “natural” scheme.

The Financial Times 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.

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

Participation is voluntary and Carvana said that for the deal to close, at least $500 million of new debt must be issued. The type of restructuring the company proposes can often serve as a prelude to the renegotiation terms or a completely different agreement.

Carvana released preliminary first-quarter results along with the terms of the stock exchange, which showed that a cost-cutting plan – including a reduction in the number of employees from 21,000 to 17,000 over the past year – is starting to bear fruit.

The results also showed that sales volume fell by as much as 28 percent in the first three months of the year compared to the same period in 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 rose 18 percent in early trading.

In January, CEO Ernest Garcia told analysts that the cost cuts resulted in a “more efficient company” and said it did not plan to raise money by issuing additional debt.

However, Carvana on Wednesday designated its auction division, Adesa, as a so-called unrestricted subsidiary, a legal maneuver that leaves the 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 debt holders, although some credit analysts had predicted Carvana would pull through because they have the legal flexibility to do so.

By the end of 2022, Carvana had $400 million in cash and the ability to raise more than $3 billion through lines of credit and unsecured real estate.

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