Published - March 23, 2023 @ 11:31 AM (EET)

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On Wednesday, Carvana (NYSE:CVNA) said it would offer to exchange as much as $1 billion of its unsecured bonds at discount prices in an effort to extend looming repayment deadlines.

The debt restructuring plan spurred investor optimism during early trading, sending shares of the used car dealer up nearly 30% on Wednesday morning before leveling off at around $9.50 a share, a 19.3% climb.

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Still, according to people familiar with the matter, bondholders that have joined forces late last year to negotiate with Carvana see the new proposal as unworkable. Combined, the group holds over 80% of Carvana's debt, placing it in a position to block the debt restructuring efforts.

Meanwhile, in a filing with the Securities and Exchange Commission, the company said the actions will provide exchanging noteholders with "collateral while reducing Carvana's cash interest expense and maintaining significant flexibility."

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WHY IT MATTERS 

Over the past year, Carvana has suffered mounting defeats, losing roughly 94% of its value and burning through $1.8 billion in cash in the last quarter as sales tumbled 23%.

The new $1 billion notes will pay 9% annually in cash or 12% on a payment-in-kind (PIK) basis, the company said.

In a maneuver that can lay the groundwork for the future of new debt tied to Carvana's car auction business Adesa US, the company also said Wednesday it moved that brand into an unrestricted subsidiary and imposed one key condition upon its debt exchange.

At least $500 million worth of its debt-holders must agree to exchange notes, or no debt restructuring will happen. The growing number of these kinds of deals has purred money managers to act, said senior credit analyst for distressed debt, Phil Brendel, at Bloomberg Intelligence.

NOW WHAT

According to the Financial Times, if fully subscribed, the exchange offer would reduce the face value of Carvana's outstanding $5.7 billion unsecured bond debt by $1.3 billion. Meanwhile, its annual cash interest bill will decrease by roughly $100 million.

As consumers moved toward online car purchasing and the used vehicle market skyrocketed to a lack of inventory of new vehicles during the Covid pandemic, Carvana was a coveted stock.

But the company failed to capitalize at the right time, leaving Carvana unprofitable even during the boom and even though its revenue has more than tripled since the last full year before the pandemic.