On December 7th, Bloomberg reported that Carvana (NYSE: CVNA)’s largest creditors, Apollo Global Management and Pacific Investment Management, signed a pact “that binds them to act together in negotiations with the company.” Suggesting that there might be talks of debt restructuring to come and the creditors want to unite and not be a headache for each other.
Between the two creditors, they own roughly $4 billion worth of Carvana’s debt. The pact is rumored to last a minimum of three months, Bloomberg reported, citing sources who asked not to be named because they were not authorized to speak publicly.
What are the Analysts Saying?
Carvana currently has 27 analysts covering the stock with an average 12-month price target of $17.44, or an upside of roughly 160%. Out of the 27 analysts, one has a strong buy rating, five have regular buy ratings, 18 analysts have hold ratings, one analyst has a regular sell rating, and two now have strong sell ratings on the stock. The street-high price target currently sits at $50, representing an upside of roughly 650%.
Wedbush Sees Rising Risk of Bankruptcy
After the news broke, Wedbush analysts released a note, downgrading the company to underperform from neutral and slashing the 12-month price target to $1 from $9, saying that in their view, the company’s bankruptcy risk is rising. On a separate note, they say that Carvana’s director of investors relation, Mike Levin, has left the company.
They add that Carvana’s bonds have been trading at 50 cents on the dollar, “indicating investors see a high probability of default.” Wedbush adds that all these factors have increased their odds of Carvana having to pursue a debt restructuring, which would ultimately leave the equity worthless in that scenario.
Asking how we ended up here, Wedbush’s analysts point to the acquisition of Adesa’s U.S. physical auction business as “an albatross around its neck.” They estimate that this acquisition added $336 million of incremental annual interest expense.
Previously, Wedbush analysts put the risk of restructuring at a low probability due to the large insider ownership. Specifically, the Garcia family owns over 40% of the equity and “has significant resources to add capital to the business to help preserve the equity.” Rather, they now believe restructuring is a real risk to common equity shareholders, as they estimate it will help reduce the company’s over $600 million in annual interest expense.
Wedbush expects the company to try and offload some of its $2 billion worth of real estate that’s not tied to any debt. However, they expect this will likely be stopped due to conveyance issues with debt holders.
Adam Jonas Continues to Wear Egg on His Face
The peanut gallery on social media has taken the recent news as an opportunity to dunk on famed Morgan Stanley Analyst and noted Tesla Champion, Adam Jonas. Who at one time touted Carvana as the “Amazon of Auto,” with a price target of $420.
With Donut Shorts giving a note on the note. Mocking Adam’s claim the company needs more capital, is challenging to analyze, and failed to generate profit during a period with absurdly low-interest rates.
Carvana shares last traded at $5.05 on the NASDAQ.
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