Carvana debt comes due with business ‘firmly in retreat’

Used-vehicle seller Carvana is staring down rising interest payments each of the next three months with vehicle sales and earnings moving in the wrong direction.

The $7.61-a-share loss the used-car retailer registered last quarter was more than triple the deficit analysts were expecting. Coming off its lowest retail unit sales in two years, Carvana forecast another drop in the first three months of this year, as it shrinks inventory and slashes marketing spending.

In May, Phoenix-based Carvana completed a $2.2 billion acquisition of Carmel-based KAR Auction Services Inc.’s U.S. physical auto auction business, ADESA. The deal included all of ADESA’s auction sales, operations and staff at 56 ADESA logistics centers in the United States, including one in Plainfield.

After making the ill-timed acquisition just as sales and used-car prices took a turn, the once rapidly growing retailer is “firmly in retreat mode,” Kevin Tynan, a Bloomberg Intelligence auto analyst, said in a note.

Carvana shares tumbled 20%, to $8.06 each, on Friday morning.

The quarterly loss reported after the close Thursday caps a disastrous year in which Carvana’s stock plummeted 98%, erasing almost $37 billion of market capitalization. While the shares more than doubled this year through Thursday, Bloomberg Intelligence credit analyst Joel Levington cautioned ahead of the earnings that the move mirrored what occurred at Hertz before the car-rental company filed for bankruptcy in 2020.

Carvana’s biggest problem is its debt, which stands at more than $8 billion, with $2.4 billion in cash burn projected over the next two years, according to Levington.

“They need to restructure their balance sheet,” he said in a phone interview. “They probably need to shave off 85% of their debt, otherwise they will be a vulnerable company for years.”

Carvana, which carries credit ratings in the CCC tier, faces a tough environment if it were to try to sell more corporate bonds. The company has more than $5 billion of debt that trades distressed, among the biggest piles of troubled securities in the world.

Some of Carvana’s largest creditors have banded together in an effort to secure more favorable terms ahead of a potential debt restructuring.

Chairman and CEO Ernie Garcia III told analysts on a conference call that plans to cut costs and eventually grow again has positioned the company to potentially avoid having to raise money or rework its debt.

“We’ve got a real shot at not requiring additional capital,” Garcia said, citing the company’s real estate portfolio as one potential source of funds. “If we’re wrong, then we have lots of ways to go out and get additional capital.”

Last week, Carvana sold more than $360 million in asset-backed bonds, its first transaction since August. The company paid more than it had in previous deals but it still showed that Carvana continues to have access to some financial markets.

The company has interest due March 1 on its 4.875% bonds due 2029. Carvana finished the year with $434 million in cash and equivalents, up from $316 million at the end of the third quarter.

In a letter to shareholders, Garcia called 2022 a “very difficult year.” Sales fell 23% in the fourth quarter, to about 87,000 vehicles. Gross profit per unit plunged by more than half.

The CEO said he expects gross profit per unit to rebound back to previous levels exceeding $4,000 per vehicle, and that Carvana wants to grow into new markets such as last-mile delivery and repair and reconditioning of cars.

Carvana’s current strategy to conserve cash by reducing inventory “does not give us confidence in the long-term viability of the business model,” John Colantuoni, a Jefferies analyst with a hold rating on the shares, said in a note. “We anticipate views around a potential restructuring process will be the primary determinant of the stock price, with fundamentals as a distant secondary factor.”

Analysts at JPMorgan Chase took an even harsher tone, removing their price target on Carvana shares to reflect “no equity value at the current level of debt.”