Carvana's bonds gain along with stock but high debt levels remain a worry

By Ciara Linnane

Carvana's bonds tacked on up to 7 cents on the dollar after comments on adjusted Ebitda

Carvana Co.'s bonds rose Friday, after the online used-car seller surprised investors with fourth-quarter earnings that highlighted some positive metrics.

The company's loss was wider than expected and revenue fell below forecasts. But Carvana (CVNA) reported record gross profit per unit (GPU) and projected that adjusted Ebitda would top $100 million in the first quarter, which was better than a FactSet consensus at the end of January of under $80 million. (Ebitda, or earnings before interest, taxes, depreciation and amortization, is often used as a profit metric although it's closer to cash flow than net profit.)

For more, read: How Carvana caused a Wall Street whiplash, as the stock soars to a 2-year high

The stock soared 39% on Friday, while the bonds added 3 1/2 cents to 7 cents, as the following chart from data solutions provider BondCliQ Media Services shows.

The blue line represents the 12% bonds that mature in 2028. The red line is the 13% bonds that mature in 2030 and the orange line is the 14% bonds that mature in 2031. The latter is showing the biggest gain.

The bonds saw net buying early in the day before sellers emerged midmorning.

The company's maturity stack looks manageable today, after Carvana conducted a successful debt exchange last August that pushed the bulk of its maturities back to 2030 and 2031.

The exchange allowed the company to reduce its debt by $1.2 billion and reduce its cash interest costs by more than $430 million a year over two years, as MarketWatch reported at the time.

The move was backed by key creditor Apollo Global Management Inc. (APO), as well as PIMCO, Ares and an ad-hoc group of noteholders. That group represented more than 90% of the company's senior unsecured notes, or about $5.2 billion.

The bondholder group "bought them some time since Carvana controls some very valuable long-term assets and boasts a digital business model that makes economic sense," said Glenn Reynolds, founder and editor of Macro4Micro, and founder and former CEO of research firm CreditSights.

"The problem is they hamstrung themselves with so much debt that their "record Ebitda" does not even cover interest expense yet."

The bondholders are well positioned for now, but as growth stocks go, Carvana is seeing two years of declines in retail unit sales and generated most of its operating cash flow in 2023 via inventory liquidation, said Reynolds.

"The debt burden relative to Ebitda is uneconomic and equity markets are still imagining a future multiple for a company that is supposed to be supported by higher retail sales, higher inventory turns, and reinvestment in expansion," he said. "Shrinking the expense line has been good, but that is not growth in revenues. They need both volume growth and unit margins improvement. Not just one. "

The stock has risen fivefold in the last 12 months, while the S&P 500 SPX has gained 27%.

Don't miss: Stocks have been moving a lot more than usual after earnings. Here's why, and what it could mean.

-Ciara Linnane

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02-23-24 1352ET

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