Handicapped with $6.5 billion of net debt and rocked by a combination of a soft economic backdrop, soaring inflation and declining vehicle sales, it appears that Carvana’s (CVNA) struggles have brought the company to the brink of bankruptcy.
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According to a Bloomberg report, ten of Carvana’s largest lenders, who collectively hold almost $4 billion of the company’s unsecured debt, have agreed to work together for three months in potential restructuring negotiations with the company.
“In our view,” said J.P. Morgan analyst Rajat Gupta, “the pact suggests that CVNA may have initiated debt restructuring negotiations with bond holders as there seems to be little end in sight for ongoing used car market weakness and management might be attempting to build cushion or flexibility.”
Gupta reckons the pact is probably to safeguard against the company negotiating “favorable terms with any one or small group of holders.”
The biggest question though right now is whether the company has enough cash to survive in the near-term. Gupta believes that via short-term revolvers, there’s “enough cushion” to last until the end of 2023, although a “severe recession could accelerate this by 1-2 quarters.”
So, in trying to get Carvana though this period, what can the consortium do to help? Gupta has some ideas: “1) Debt/equity exchange, including extension of maturities – lowers debt stack and interest expense but CVNA would still need liquidity; and 2) Secured debt exchange which include raising additional capital and extending maturities – helps with liquidity runway. To be clear, none of these outcomes favor the equity holder, but also reduces the likelihood for Ch. 11 filing in the near-term.”
All told, Gupta’s rating stays a Neutral, while the price target is lowered from $10 to $5. (To watch Gupta’s track record, click here)
Most analysts agree with Gupta’s stance; the stock gets a Hold consensus rating, based on 12 Holds, 4 Buys and 2 Sells. (See Carvana stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
