Carvana shares are getting crushed on Wednesday over concerns the used car retailer may be forced into bankruptcy.
The stock fell more than 30% after Wedbush analyst Seth Basham said “bankruptcy risk rising,” noting a significant decline in the company’s bonds. “We believe these developments indicates a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario (pre-packaged or otherwise), or highly diluted in a best case” he explained in his research note, which included a downgrade of the stock to underperform.
In an email statement to FOX Business, a Carvana representative said, “Carvana is not involved in any cooperative agreement amongst bondholders and we will not be addressing any questions that arise from actions taken by such bondholders. Our message to our customers, shareholders, employees and other stakeholders remains clear: we are singularly focused on executing on the plan to profitability outlined in our Q3 Shareholder Letter and we have substantial liquidity to get us there. In no way does today’s news change that strategy.”
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During the earnings conference call last month, CEO Ernie Garcia declined to provide a 2023 forecast and outlined the challenges facing the company including lower demand, auto depreciation, the pressure to cut expenses and rapidly rising interest rates.
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“Interest rates have risen rapidly with the two-year treasury a good benchmark for automotive loans rising 3.9% over the last year and 2.6% since 2019,” he said. “In addition, credit spreads have risen about 1% in the last year” said Garcia.
“To put this in perspective for a customer utilizing financing, the moves into your current yields plus credit spreads of last year are equivalent in their impacts on the customer’s monthly payment of about a $3,000 price increase. As a result, for customers using financing, cars ended the quarter at their most unaffordable point ever, despite the fact that retail prices have dropped roughly 10% this year.”
Additionally, the company slashed 1,500 workers or about 8% of its workforce last month.
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Earlier in the week, Bloomberg reported creditors including Apollo and Pimco agreed to work in tandem if a restructuring is necessary.
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