Exchange nirvana
Facing certain collapse, innovative car seller Carvana hammered out a deal to restructure US$5.5bn in debt, pushing advisers on all sides to stretch the parameters of liability management exercises that have come to dominate the restructuring landscape.
Carvana took auto retailing by storm in 2014 – it was the sales platform of the future. Selling cars in the same way Hershey’s sells chocolate bars and Coke sells fizzy drinks – through a see-through sort of vending machine (and online). That business model peaked in 2021 following the pandemic when people were high on personal cars and down on public transit.
To take advantage of the market, Carvana layered on debt to fund its expansion but as the buying boom ended, car prices fell as rising interest rates chilled demand. The rising interest rate environment also made the company’s debt load unmanageable.
By July 2023, Carvana and its bondholders, including Apollo Global Management, came to an agreement that covered more than 96% of its US$5.7bn in unsecured notes across five tranches, exchanging existing bonds for new secured debt.
The company was able to avoid bankruptcy allowing its owners, including CEO Ernie Garcia III and his father Ernie Garcia II, to maintain control of the company.
“It is the most successful bond exchange ever,” said Moelis co-head of restructuring William Derrough. Moelis was financial adviser in 2022.
The threat of stripping a key asset from bondholders set the stage for final negotiations.
Carvana bought car auction business Adesa for US$2.2bn in 2022. For leverage in talks with bondholders Carvana designated Adesa as an unrestricted subsidiary, theoretically allowing the company to use the unit as collateral for a new layer of debt.
The strategy proved effective.
The final deal reduced the company’s debt by 20%, capturing discounts in the bonds that traded below 40 cents on the dollar in some tranches; reduced cash interest by US$910m over two years; and pushed out maturities, including most importantly a US$500m 2025 bond maturity.
The new bonds are split into three tranches due in 2028, 2030 and 2031 with interest rates between 9% and 11%. Each tranche has PIK options allowing the company to skip interest payments but effectively increasing the rate to 12% and 14%.
The new debt is more expensive than debt in the previous stacks, but the company is hoping the time it bought with the exchange will give the business enough room to rebound.
Carvana’s shares, which traded at more than US$375 a share in August 2021, collapsed below US$4 at the end of 2022 but rebounded to US$40 a share following the debt exchange.
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