Ernest Garcia III, CEO of Carvana, speaks to CNBC on the floor of the New York Stock Exchange, March 7, 2019.
Brendan McDermid | Reuters
Shares of carvana fell more than 40% in Wednesday morning trading after the online used car retailer’s biggest creditors signed an agreement binding them to act together in negotiations with company.
The treaty, as first reported by Bloomberg, which includes creditors such as Apollo Global Management and Pacific Investment Management that hold about $4 billion of Carvana’s unsecured debt, or about 70% of its total outstanding debt. The deal will last at least three months.
Such creditor agreements are seen as a way to streamline negotiations around new financing or debt restructuring. They have helped prevent creditor struggles that have complicated other debt restructurings in recent years.
A person with knowledge of the situation but not authorized to speak publicly on the matter confirmed the details of the deal on Wednesday to CNBC. They downplayed the deal signaling any growing concerns about bankruptcy, citing the company’s meaningful liquidity runway.
After the creditor deal, Wedbush . analyst Seth Basham said wednesday Carvana’s bankruptcy was growing, and he downgraded his stock to underperformer from neutral and lowered his price target to $1 from $9 a share.
JPMorgan said on Wednesday that the creditor agreement signaled that Carvana “may have initiated debt restructuring negotiations with bondholders” but that “the imminent possibility of a Ch. 11 filing has looks low.”
Rajat Gupta said in an investor note: “We believe CVNA has enough cushioning through short-term rotations to push through through the end of 2023 and a severe recession could accelerate that too. this program in 1-2 quarters”.
Carvana did not immediately respond to comment. Pimco and Apollo declined to comment.
Trading in Carvana stock was briefly halted Wednesday morning after the stock fell below $5 a share for the first time since the company went public in 2017. Shares were fell below $4 a share after the pause was lifted. Shares of Carvana have plummeted about 97% this year after hitting an all-time intraday high of $376.83 per share on August 10, 2021.
Carvana has received a flurry of analyst downgrades since the company disappointing third quarter earnings report last month and offered a bleak outlook.
The company has grown exponentially over time coronavirus pandemicas shoppers turn to online purchases instead of going to a dealership, with the promise of easy buying and selling of used cars at customers’ homes.
But Carvana doesn’t have enough vehicles to meet rising consumer demand or the facilities and employees to handle the vehicles the company has in stock. That prompted Carvana to buy ADESA and a record number of vehicles amid sky-high prices as demand slows amid rising interest rates and recession fears.
Carvana has borrowed money multiple times to cover its losses and growth initiatives, including a $2.2 billion all-cash acquisition earlier this year of its operations. Adesa’s physical auction business in the United States from KAR Global.
Last week, Bank of America downgrade Carvana neutral, saying the company desperately needs more liquidity as it struggles to turn a profit. Analyst Nat Schindler said the company is “likely to run out of cash by the end of 2023. There’s no sign of a potential cash flow yet.”
And last month, Morgan Stanley pull its rating and target price for the stock. Analyst Adam Jonas cited the downturn in the used car market, corporate debt and an unstable funding environment for the change. He also said the company’s stock could be worth as little as $1.
– CNBC Michael Bloom contributed to this report.
