New Coverage: Despite Negative EBITDA, Carvana Has Significant Capacity for Debt, Investments Under Asset-Based Grower Baskets; Restriction on Material IP Transfers Can Be Removed by Majority of 2030 Noteholders Only

Relevant Items:
Carvana Covenants Tear Sheet, Debt Document Summaries
Carvana Debt Documents

Carvana Co. provides an online platform for buying and selling used cars. The company also offers financing to buyers and generates additional revenue by selling the loans, including through securitizations.

Carvana’s stock price has fallen dramatically since last summer from a high of more than $370 per share in August 2021 to $25.14 on June 22. Carvana’s bonds have dropped as well: The company’s unsecured notes due 2027, 2028 and 2029 are each trading in the mid-to-low 60s as of June 22.

Carvana’s debt consists of approximately $3.8 billion of asset-based financing, including finance leases, primarily under a $3 billion short-term revolving facility (the “floor plan facility”) of subsidiary Carvana LLC, which is used to finance vehicle inventory. Approximately $2.57 billion was outstanding under the floor plan facility as of March 31, 2022.

Carvana also has $5.725 billion outstanding under five series of unsecured bonds maturing from 2025 through 2030.

Carvana’s capital structure as of March 31 is summarized below, pro forma for the ADESA acquisition, 2030 notes and April 2022 stock offering (discussed further below):
 
As of March 31, pro forma for the ADESA acquisition, 2030 notes issuance and the April 2022 stock offering, Carvana had liquidity of approximately $2.96 billion, consisting of $2.48 billion of unrestricted cash and equivalents and $483 million of availability under short-term revolving facilities. Pro forma cash includes approximately $2.23 billion of proceeds from the 2030 notes and April 2022 stock offering, though $1 billion is expected to be used to fund improvements to ADESA properties.

Carvana also reports approximately $1.92 billion of additional “liquidity resources,” pro forma for the ADESA acquisition, consisting of $1.76 billion of real estate and $153 million of other assets that are presently unpledged but “can be financed using traditional asset-based financing sources.”

Carvana’s pro forma liquidity and liquidity resources are summarized below:
 


On April 20, Carvana released its financial results for the first quarter of 2022, describing it as a “challenging quarter” in which, even though the company “continued to increase market share rapidly … several external and internal factors impacted our financial results.”

On the earnings call, management identified three “primary drivers” of the first quarter’s results: 1) “operational constraints” impacting the company’s inspection centers and logistics network, 2) the industrywide impact of affordability and consumer sentiment, and 3) the rapid rise in interest rates, which reduced returns on sales of its originated car loans. The company, however, “view[s] these impacts as transitory setbacks.” Management noted that indications of underlying demand “look great” and that the company “continue[s] to rapidly gain market share in this difficult environment as we grew by 14% [units sold compared with the first quarter of 2021], while the market around us is shrinking.”

For the first quarter, the company reported revenue of almost $3.5 billion (vs. $2.25 billion a year earlier), net loss of $506 million (vs. net loss of $82 million a year earlier) and adjusted EBITDA of negative $364 million (vs. negative $27 million a year earlier). The company’s reported LTM adjusted EBITDA as of March 31 was negative $326 million.

The company revised prior guidance that it would achieve “approximately EBITDA breakeven in the last three quarters of 2022 taken in aggregate” and said it now “expect[s] a return to … positive EBITDA to be pushed back a few quarters and then to resume our march to our long-term financial model.”

Noting the various trends and “macroeconomic uncertainty impacting the used vehicle market,” the company indicated that “at this time we are no longer providing specific numeric near-term guidance for the remainder of the year.”
 
After the first quarter, on May 10, Carvana completed its acquisition from KAR Auction Services of the ADESA U.S. physical vehicle auction business, including 56 locations. Carvana financed the acquisition with $3.275 billion of senior unsecured notes due 2030, with $2.2 billion of the proceeds applied to the purchase price. The remaining proceeds are slated to fund $1 billion of real estate improvements over “multiple years” in the ADESA sites to expand production capacity at the ADESA sites from 200,000 per year to 2 million per year.

Financing for the ADESA transaction originally consisted of $2.275 billion of unsecured notes and $1 billion of perpetual preferred stock. After launch, however, the notes offering was upsized to $3.275 billion, and the preferred stock offering was terminated. Apollo is reported to have purchased $1.6 billion of the 2030 notes after Carvana had difficulty syndicating the notes. We previously analyzed changes reflected in the final terms of the 2030 notes.

Among other things, the company said it expects the ADESA acquisition to reduce delivery times and per-sale costs, because Carvana IRCs (inspection and reconditioning centers) will be located closer to customers, and to increase vehicle inventory. Once the planned buildout is completed, the acquisition is expected to triple Carvana’s production capacity from 1 million to 3 million units per year.

The acquired ADESA business generated approximately $881 million of revenue and $113 million of EBITDA in 2021. However, Carvana said it expects revenue and EBITDA from ADESA’s auction business to be lower in 2022 because of continued vehicle supply issues and technology licensing fees required to be paid to KAR.
 
On April 26, Carvana completed a public offering of 15.625 million shares of Class A common stock, 5.4 million of which were purchased by CEO Ernie Garcia III and his father. The offering generated $1.2 billion of net proceeds, which are slated for general corporate purposes.

On May 10, Carvana announced a workforce reduction of approximately 2,500 employees in connection with previously announced plans to better align staffing and expense levels with sales volumes.

Carvana has received additional negative publicity recently in connection with reported failures to transfer titles to purchasers within required time periods. On May 10, the company’s license to operate in Illinois was suspended after an investigation into customer complaints. The suspension has since been stayed, allowing Carvana to conduct business in Illinois “under strict guidelines.”
   
Generally, except with respect to redemption and certain provisions in the 2030 notes discussed below, each of Carvana’s outstanding notes contains substantially similar covenants and other terms.

The 2030 notes are in most respects substantially similar to Carvana's other notes but include the following material differences:
 

• Material IP transfer prohibitions: Under the 2030 notes, unrestricted subsidiaries are generally barred from owning intellectual property that is material to the company’s business as a whole. The other notes include no such provision.
   
• Bankruptcy make whole: The 2030 notes, like Carvana’s other notes, include a “bankruptcy make whole” provision. In general, such a provision - which may or may not be enforced in a chapter 11 case - purports to require payment of an additional premium under certain circumstances if notes are accelerated, including upon a bankruptcy filing. Under the 2030 notes, the provision would require, after an acceleration at any time, a premium equal to the present value (discounted at T+50 bps) of all remaining future interest payments through maturity. By contrast, a typical high-yield “make whole” redemption (before the beginning of the redemption call schedule) requires a premium equal to the present value of future interest payments through the first call date (not through maturity) plus the present value of the premium required for a redemption on that first call date (each discounted at T+50bps).
  
  Carvana’s other notes include a more typical bankruptcy make whole provision, under which the premium due upon acceleration is equal to the redemption premium that would be due if the notes were redeemed on that date.
   
• Default interest: Following a failure under the 2030 notes to make payments when due of principal, interest, the bankruptcy make whole premium or redemption or change-of-control repurchases, the unpaid amounts will accrue interest at the applicable rate plus a 2% default rate. Carvana’s other notes do not include a default interest provision.
   
• Make whole redemption: The 2030 notes have a five-year make whole period. Under the other notes, this period is two years (under the 2025 notes) or three years.
  
  Also, under the 2030 notes, the make whole redemption price is 101% plus the make whole premium. In Carvana’s other notes, like almost all high-yield notes, the price is 100% plus the premium.
   
• 10% redemption: For the two years before the 2030s’ call schedule begins on May 1, 2027, the company can redeem up to 10% of the initial 2030 notes at 105.125%, which is also the premium for the first call period. Carvana’s other notes include no such redemption option.
   

Most of the differences between the terms of the 2030 notes and Carvana’s other notes reflect changes made to the 2030 notes from the preliminary terms as described in the offering memorandum, which we analyzed HERE.

The addition of a material IP transfer prohibition in the 2030 notes could advantage certain 2030 noteholders over other noteholders in a distressed scenario. The prohibition can be amended or removed with the consent of a majority of noteholders. Therefore, if Carvana sought to engage in a J.Crew-type transaction, a majority of 2030 noteholders could agree to remove the blocker in exchange for a better position in a new capital structure. As noted above, it has been reported that Apollo purchased approximately half of the initial $3.275 billion of 2030 notes.

As discussed below, the 2030 notes may also be limiting with respect to asset transfer capacity (though capacities under the 2030 notes are still significant). To the extent Carvana required additional dividend or investment capacity in connection with a debt restructuring, consent from a majority of 2030 noteholders would be sufficient to expand capacity to the limits available under the remaining notes.

While the restrictive covenants under each of Carvana’s notes are generally the same, the current debt and payments capacities provided under each are not identical, because usage and accrual under certain baskets are dated from the issue date of the applicable series.
 
Many baskets under Carvana’s notes include “grower” components, sized at the greater of a fixed amount and a percentage of total assets. Under each of these baskets, the total assets component now significantly exceeds the fixed amount. For example, the general debt basket, sized at the greater of $500 million and 20% of total assets, now provides an estimated $2.35 billion of debt capacity, pro forma for the ADESA acquisition and other recent transactions.
 
Carvana can incur approximately $4.7 billion of general-purpose secured or unsecured debt, plus $235 million of nonguarantor debt, which would be structurally senior to the existing notes.

Under each of Carvana’s notes, a ratio debt basket (subject to a 2x fixed charge coverage ratio test) as well as a leverage-based component of the “Credit Facilities” debt basket (subject to a 2.5x net secured debt ratio test) have likely been inaccessible at all relevant times.

Any asset-based debt incurred after issuance of any of the notes is assumed to have been permitted under special-purpose debt and liens baskets as follows:
   
Carvana is currently permitted to make approximately $3.27 billion of investments, including transfers to unrestricted subsidiaries; this amount includes $578 million that can alternatively be used for dividends. As noted above, the 2030 notes (and only the 2030 notes) prohibit transfers of material intellectual property to an unrestricted subsidiary.

The 2030 notes are likely limiting with respect to restricted payment capacity, since buildup basket capacity under all other notes was increased by the $1.2 billion of proceeds received from the company’s April 2022 stock offering (the 2030 notes were issued on May 6, after the offering). Buildup basket capacity under those notes is likely partially offset, however, by the income-based component, which adds to capacity on the basis of 50% of “Consolidated Net Income” since the quarter of issuance, if this amount is positive, but reduces capacity by 100% if the amount is negative. Carvana has reported a cumulative net loss during each applicable buildup period.

Similarly, the 2030 notes are likely limiting with respect to investment capacity because, under all the other notes, the proceeds from the April 2022 stock offering increased capacity under a “Permitted Investments” basket allowing investments in the amount of net cash proceeds from sales of stock after issuance. None of the notes prohibit such proceeds from being double-additive, both increasing investment capacity under this basket and restricted payment capacity under the buildup basket.

For Carvana’s covenants tear sheet and full covenant summaries of Carvana’s notes, click HERE.

--Mitch Oates