Carvana Co.’s biggest bondholders may wind up better off if the beleaguered online car seller ends up in a position companies usually try to avoid: bankruptcy.
(Bloomberg) — Carvana Co.’s biggest bondholders may wind up better off if the beleaguered online car seller ends up in a position companies usually try to avoid: bankruptcy.
A quick bankruptcy filing that exchanges debt for equity could preserve the business and provide an initial recovery of around 50% for bondholders, with the potential for those investors to nearly be made whole by 2026, according to Joel Levington, Bloomberg Intelligence’s director of credit research.
Dragging the company through a controversial debt exchange amid the backdrop of a plummeting share price is a painful alternative. And major bondholders — including the likes of Apollo Global Management Inc. and Pacific Investment Management Co. — would probably favor a jaunt through the bankruptcy process instead, Levington added in a Thursday note.
To be sure, not all debt investors would favor bankruptcy. Unsecured bondholders would undoubtedly fare much worse, with retail bankruptcies tending to wipe them out.
In March, Carvana offered to exchange as much as $1 billion of its unsecured bonds at discounted prices. A group of funds holding most of the company’s more than $5 billion in bonds said that was a nonstarter, Bloomberg earlier reported.
The firm added to bondholders’ fears by moving its car auction business into an unrestricted subsidiary. That maneuver can lay the groundwork for the future issuance of new debt tied to that brand — a play J. Crew infamously made that irked investors.
Should Carvana need to restructure, it wouldn’t end in liquidation, according to Levington. Still, the firm needs to claw back market share and start growing again. To do that, it needs to slash its debt and have enough cash on hand. “Such an outcome appears untenable without a major balance sheet restructuring,” he said.
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