Ailing digital auto retailer Carvana has offered to exchange up to $1.0 billion U.S. of its bonds at a discount in an effort to restructure its debt and reduce debt servicing costs.
The Tempe, Arizona-based online used-car dealer is offering to swap five series of unsecured bonds, including its 5.625% unsecured notes due 2025 and 10.25% unsecured notes due 2030 for new secured notes due 2028 that pay 9% in cash or 12% in-kind, Bloomberg reported. The debt would be secured by a second-priority claim on the company’s assets, including vehicles.
Holders can swap their bonds for between 61.25 cents on the dollar and 80.875 cents on the dollar, depending on when they submit the notes, according to Carvana’s announcement.
Those who take up the offer will get a better deal than is currently available on the open market.
Carvana’s 10.25% bond due 2030 last changed hands at 53 cents on the dollar, Bloomberg reported, citing market data from Trace.
Carvana has also turned its auction business Adesa U.S. into an unrestricted subsidiary, a move that facilitates debt issuance tied to the latter.
The maneuver recalls a gambit that upset J. Crew investors, when the struggling apparel retail company transferred intellectual property, including its brand name, into such a unit and then used that collateral to issue debt, Bloomberg noted. Adesa would not be used to secure the bonds in the current offer, Carvana stated.
Over the last 18 months, Carvana has gone from rocketing growth to the brink of bankruptcy. The company’s stock soared during the pandemic when physical car lots shut down and used-car prices hit record highs, but as Covid-19 ebbed, unit sales declined, and its debt now exceeds its market cap.
A critical challenge for Carvana, what one analyst called “the elephant in the room” during the company’s Q4 2022 earnings call, is its ballooning interest payments. With the cost of borrowing rising significantly over the past year, Carvana’s interest payments have risen at a frightening rate — almost trebling between 2021 and 2022, from $176 million to $486 million. Moreover, analysts have calculated that this figure will reach $600 million this year.
If fully subscribed, the debt restructuring would reduce the company’s interest payments by about $100 million per year, Seeking Alpha reported.
Carvana shares jumped more 25% Wednesday morning from the previous day’s close on news of the bond-swap plan. However, this was still more than 95% down from its August 2021 peak.
The early deadline for the swap, which offers the best terms to investors, is 4 April.