Who can Benefit from Carvana Running Out of Cash in the Next 12 months

Who can Benefit from Carvana Running Out of Cash in the Next 12 months 

Jefferies analyst John Colantuoni, recently suggested that, "For perspective, our model has Carvana running out of cash in 1Q23 without an additional infusion,". He adds to this, "The deterioration in liquidity was precipitated by worsening unit economics and higher interest payments, following the $3.275 billion debt issuance in May 2022 tied to the U.S. ADESA acquisition.". 

Known as the "Amazon of used cars," Carvana have been crushed on the stock market, plummeting by a massive 96.84% year-to-date.

How did Carvana End up Here?

Carvana stock were trading at a record high of $361 in August 2021, as consumers purchased cars online and moving to different cities during the COVID-19 pandemic. Since interest rates were nearly zero, it was easy for consumers to finance their purchases of cars and Carvana could pay for its expansion with cheap money. Even during the pandemic, Carvana, once hailed as a pioneer for creating its car vending machines, went into debt five times. 

The upswing during the pandemic: As supply chain bottlenecks got amplified due to shutdowns and the pandemic, car manufacturers found themselves to be low on inventory as semiconductor chips were in high demand and low supply. The lack of inventory pushed both used and new car sales to new levels.

Now, fears of a recession and job cuts in industries such as tech have resulted in consumers taking a wait-and-see approach to making large purchases. This is also coupled with Federal Reserve continuing to raise interest rates in an attempt to curb high inflation rates. This has resulted in consumers now facing higher auto loan rates, which makes their monthly payments more expensive. Same trends are being seeing the housing industry, with now higher inventory and lowering demand. 

What's the Current State of Affairs with Carvana?

If Carvana receives the much-needed capital, its stock may rebound. The immediate outlook does not good though. 

• Bank of America analyst Nat Schindler cut his price target to $10 from $43 and lowered his rating to neutral from buy.
• Moody's, the rating agency, cut Carvana's prospects and lowered the debt to negative.
• Baird and Cowen, who were both former bulls of the stock, downgraded the company's stock to hold.
• Oppenheimer downgraded the stock in Nov and analyst Brian Nagel lowered the shares to hold from buy

To date no investors have stepped up to the plate to help out Carvana. As reported by Yahoo News, A group of Carvana’s 10 biggest lenders holding around $4 billion of the company's unsecured debt reportedly made a three-month pact to act together in the case of restructuring. The reported pact could make it far tougher for Carvana to restructure its business to survive and could also make any cash raise very costly from a cost of capital perspective.

So What Happens Next & Who Makes a Play for Carvana?

This is where investors, who deal with distressed companies are making plans. From a stack rank perspective, debt (and all its different forms), carries the highest payout. Equity, 40% of which in Carvana is owned by the Garcis, is way down the rank. If the company and its assets are diluted, either through restructuring, debt infusion, leveraged buyout, the debt note holders will be the first to get paid, in order of seniority of debt. Equity holders may end up with nothing.

Since, Carvana is a publicly traded company, it would be easier for different alternative investors to do the due diligence. We personally see this as a distressed asset, that required both a cash infusion, but also restructuring of its strategy and execution. Firms that have expertise in these type of asset class are hard at work running the numbers and will probably soon make a move.