Carvana tumbles 36% as bankruptcy risk rises 📉

Carvana (CVNA.US) in 2021 was referred to as the 'automotive Amazon' and one of the favorite companies of hedge funds, along with one of the winners of the post-pandemic euphoria. Today, the company is facing serious fundamental problems holding more than $7 billion in debt to $340 million in capital. The stock deepened its sell-off today after Wedbush analysts reported on the sales platform's growing threat of insolvency and bankruptcy. As for now shares are more than 36% lower:

• The stock plunged 43% in November and is deepening declines in December. The stock finished the previous year at $232 per share. Today te price is about $4.7 per share making the company worth significantly below 1 bln USD in compare with 40 bln USD in 2021. The group's investors and creditors are clearly losing confidence in the company's profitability. Carvana's bonds are currently priced below $0.50, meaning that funds rate the probability of default as very high;
• Bloomberg reports that investment funds Apollo Global and Pacific Investment have already signed a pact to jointly enter into negotiations with the company to recover their investments. They are part of a group holding roughly $4 billion in unsecured Carvana debt. The expected timeframe for completion of the talks is three months, suggesting that the funds are confident of exacerbating the problems of a company that was originally supposed to revolutionize the secondary car market.

More and more money

The group's car vending machines did more than adequately during the pandemic, when consumers wanted to avoid physical contact with sellers. Adding to the problem was the supply of new cars, whose production was limited by complications in supply chains - as was their availability. So consumers turned to used cars driving up their prices and the Carvana business itself. In addition, the Fed flooded consumers with money from its economic stimulus fiscal programs which caused car consumption as well as the appetite for cheap credit to increase. Interest rates were almost zero, which meant that it cost very little to finance a car purchase. Today, the situation has reversed, with demand for used cars falling at a double-digit rate in the US since the beginning of the year. Even if the Fed starts to apply the brakes, borrowing costs are unlikely to fall as fast as they have risen.

Knockout punch?

The company is suffering from a shortage of cash and growing debts. It faces an aggressive cycle of rate hikes by the Federal Reserve, which is focused on choking off inflation. The increases are thus a triple and potentially knockout punch for the company

They increase the cost of credit for consumers by inhibiting their appetite for risk and used cars, and increase the cost of borrowing and debt service for companies willing to invest in its business. Additionally,they are bad for Carvana itself, as the company has significant debt . In the first three quarters of 2022, the company burned more than $1 billion in cash. All this makes analysts increasingly certain of a painful credit crisis for the company.  

"We currently believe that Carvana, which has been cut off from cash inflows, is likely to exhaust its financing by the end of 2023 (...) there is no indication yet of a potential cash inflow, for example from the Garcia family (the company's CEO), and it is impossible to predict if and when this will occur." - Bank of America analysts pointed out. Carvana did not immediately respond to a request for comment on the BofA note. The company has between $6 billion and $7 billion in net debt with a small amount of cash on its balance sheet. According to FactSet, the debt may be as much as 18 times the cash it holds. Adjusted EBITDA margin loss is far from profitable although it rose 6.2% in the third quarter. The company is drastically cutting costs to slow the slowdown. After cutting 2,500 jobs in May, the company announced an additional wave of layoffs that will affect another 1,500 employees. That, however, may still prove to be too little in the face of a weakening macro outlook and more expensive money.

Carvana (CVNA.US) shares, D1 interval. Concerns around bankruptcy are driving the shares of the automotive e-commerce platform priced lower and lower, offering aggressive traders an attractive risk premium. However, we can assume that the atmosphere around the business will improve if management decides to finance the business with its own funds. Investors fear, however, that this situation will not occur, and the company's business is doomed to a severe failure due to a radical change in monetary policy and decelerating demand for used cars in the US. Source: xStation5