Published - November 8, 2022 @ 4:17 PM (EET)

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Shares of Carvana (NYSE:CVNA) drastically plunged on Wednesday following news that the online car retailer signed an agreement with its largest creditors to act together in negotiations with the company.

As worries grow about the company's solvency due to plunging used-car prices, Carvana has spoken with its advisers at Kirkland & Ellis and Moelis & Co. about options for managing its debt load, according to people familiar with the matter.

The deal includes creditors like Apollo Global Management and Pacific Investment Management holding around $4 billion of Carvana's unsecured debt, or about 70% of the total outstanding.

The agreement is likely to last a minimum of three months.

While a spokesperson for Carvana declined to comment on the discussions with advisers, the company said it had not entered into any cooperative agreement with bondholders but instead focused on efforts to become profitable.

WHY IT MATTERS

Carvana's stock is already down more than 98% since the beginning of 2022 and analyst firm, Wedbush, believes the stock is likely to remain in freefall.

On Wednesday, Wedbush downgraded the stock from Neutral to Underperform and significantly lowered its price target from $9 to $1, citing an increased risk of bankruptcy.

In a new note to clients, Wedbush analysts wrote,

"Combined with the fact that many CVNA bonds have been trading at ~50 cents on the dollar, indicating investors see a high probability of default, we view this news negatively for the CVNA shares."

To make matters worse, Carvana dropped below $5 to $4 for the first time since going public in 2017, while other Wall Street analysts also slashed their rating on the stock in recent months. 

NOW WHAT

Once a hedge fund darling, Carvana greatly benefited from the Covid economy when car dealerships shut their doors across the US in 2020.

Back then, consumers could go online to select their vehicles and have them delivered to their doorstep. This dynamic sent the company's shares skyrocketing over 160%.

But with used car prices plummeting this year, Carvana's margins have been painfully hit, as rising interest rates make financing a car more expensive. 

“These developments indicate a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario, or highly diluted in a best case.” Equity analyst, Seth Basham at Wedbush.

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