Carvana Online Used Car Company (CVNA-USA) plunged more than 40% on Wednesday (7), the biggest one-day decline in stock prices since the company went public. The company’s 10 biggest creditors have signed an agreement to form a united front in restructuring talks with the company.
The settlement includes creditors such as Apollo Global Management and Pacific Investment Management Company (PIMCO), which hold approximately $4 billion in Carvana’s unsecured debt, or approximately 70 percent of total outstanding debt. The agreement will last at least three months.
Such creditor agreements are seen as a way to streamline negotiations for new financing or debt restructuring, a common practice in recent years to reduce disputes with creditors that complicate debt restructuring.
Carvana plunged 42.92% Wednesday to close at $3.83 a share, a drop that refreshed the 38.95% drop set Nov. 4, the biggest one-day drop since the stock went public in the 2017. Carvana’s shares are down more than 98% so far this year, according to data from FactSet.
People familiar with the matter confirmed the details of the deal to the media, but didn’t respond discreetly that the deal implied that creditors were more concerned about the company’s bankruptcy, arguing that the company had significant liquidity channels.
After creditors signed off on the deal, Wedbush analyst Seth Basham on Wednesday said Carvana’s bankruptcy was increasingly likely and downgraded its stock to underperform from neutral with a price target of $1 per share from $9.
JPMorgan analyst Rajat Gupta said Wednesday that the settlement with creditors means “Carvana may have entered into debt restructuring talks with bondholders, but the chances of filing for Chapter 11 bankruptcy now appear to be low.”
Rajat Gupta believes that Carvana should be able to survive until the end of 2023 through short-term turnover and a severe economic downturn could accelerate by 1-2 quarters.
Carvana did not immediately respond to a request for comment. Pimco and Apollo declined to comment.
BofA analyst Nat Schindler downgraded Carvana’s shares to “neutral” from a “buy” last month, one of several recent downgrades, citing the company’s continued cash drain.
“We now believe that without a cash injection, Carvana could run out of cash by the end of 2023,” Schindler wrote at the time.
Carvana is among the companies whose shares have soared during the pandemic, as buyers flocked to used cars when disruptions occurred in the supply chain for new cars. However, rising interest rates and borrowing to fuel rapid growth spelled disaster for Carvana stock.
AutoNation Competitor (ANUS) is still up more than 2% this year.
