Carvana, a used car dealer, strikes a debt restructuring deal

Carvana, the troubled used-car retailer, announced Wednesday that it has reached a debt restructuring agreement with most of its bondholders in a bid to cut interest payments over at least the next two years and put its business on a more solid financial footing.

The once fast-growing company, which sells cars online and in parking garages dotted around the country, thrived during the pandemic, when demand for cars soared and many people were willing to buy them unnoticed. But Carvana took on a lot of debt, made a major acquisition and was not prepared for low used car prices and high interest rates.

Carvana said its restructuring agreement covered more than $5 billion in large unsecured bonds and included the participation of Apollo Global Management, its largest bondholder. Under the deal, creditors will receive new secured bonds.

The huge interest on this new debt, higher than what the company is currently paying, will be paid in kind over the next two years, which means Carvana’s principal debt will increase but the company won’t have to make about $430 million in interest payments in cash. Some of the new debt will also come in later than the old bonds.

This style of debt is typically used by companies in significant trouble, which allows them to defer immediate costs. Lenders hope to stabilize the company in the near term while providing investors with greater income later on, to offset the large loss in value of the old bonds.

“This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and reducing cash interest expense in the near term as we continue to execute on our plan to achieve significant profitability and return to growth,” the company’s chief financial officer, Mark Jenkins, said in a statement.

Carvana also reported on Wednesday that it lost $105 million in the second quarter, an improvement over the $439 million it lost in the same period a year ago. The company said that retail sales of used cars fell by 35 percent to 76,350 cars and trucks. But the average gross profit for a car sold nearly doubled to $6,520. Carvana said it has cut costs by more than $1 billion since the start of 2022.

The company’s stock, which traded at about $4 a share in December, has risen in recent months on signs that its struggling business has been doing better and on hope that the company and its creditors will restructure its debt without resorting to bankruptcy.

The stock rose about 30 percent to about $51 on Wednesday afternoon after it announced its earnings and debt restructuring. In the summer of 2021, Carvana shares were trading at more than $300.

The debt restructuring covers more than 90 percent of Carvana’s $5.7 billion in unsecured notes. Holders of about $5.2 billion in those bonds agreed to the deal, which gives them $324 million in cash and new securities secured by real estate and other assets. The company said the remaining creditors holding the old bonds would be offered an opportunity to join a debt restructuring deal.

The new bond is divided into three tranches. The first billion dollars will yield interest at 12 percent annually for the first year. Carvana will have the option in the second year to pay a 9 percent cash coupon or continue to receive 12 percent interest. After two years, the new bond will pay a regular interest of 9 percent.

New notes will mature in 2028; The old bonds, which carry interest rates ranging from less than 5 percent to more than 10 percent, mature in 2025 or between 2027 and 2030.

The second tranche of $1.5 billion in new debt accrues interest at 13 percent annually in the first year. In the second year, the company has the option of paying 11% interest or charging 13% interest. The final $1.9 billion tranche will have 14 percent interest for the first two years before it drops to a normal coupon of 9 percent. The second and third tranches will be due in 2030 and 2031.

“Apollo is pleased to support this debt swap agreement, which will significantly strengthen Carvana’s financial position while providing creditors with new first mortgage debt,” John Zito, Apollo’s deputy chief investment officer for credit, said in a statement.

At the end of 2022, as Carvana’s financial problems deepened, old bonds had fallen to just 40 cents on the dollar, indicating that many investors feared the company might default.

In conjunction with the bond deal, Carvana will issue approximately $350 million in new shares. The company’s two largest shareholders—the CEO, Ernie Garcia III, and his father, Ernie Garcia II—agreed to buy up to $126 million of those new shares.