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Carvana plunges 45% as major creditors reportedly form pact to cooperate on restructuring

Markets Insider 12/7/2022 (Matthew Fox)
Carvana CEO Ernest Garcia III. Brendan McDermid/Reuters © Brendan McDermid/Reuters Carvana CEO Ernest Garcia III. Brendan McDermid/Reuters
  • Carvana stock plunged 45% to a record low on Wednesday after a report of a pact between creditors. 
  • The pact was signed by 70% of Carvana's unsecured debt holders, and it is designed to prevent a nasty creditor fight if Carvana goes bankrupt.
  • Carvana's bonds traded for just 32 cents on the dollar on Wednesday, signaling that investors think a bankruptcy may be looming.

Carvana stock plunged 45% to a record low on Wednesday after a group of its unsecured debt holders formed a cooperation pact, according to a Bloomberg report.

Some of Carvana's largest creditors, including Apollo Global Management, BlackRock, and PIMCO, signed a pact that binds them together in credit negotiations with the company, according to the report.

The agreement will last at least three months and is designed to prevent the creditor fights often seen during periods of debt restructurings or bankruptcy filings. About 70% of Carvana's unsecured debt holders, representing about $4 billion, joined in on the cooperation agreement.

The move is seen as a way for debt holders to negotiate more favorable terms with the company in the event that it does end up filing for bankruptcy. 

And bankruptcy appears more and more likely for Carvana, at least evidenced by the way its bonds are trading. According to data from Bloomberg, Carvana's corporate debt issue maturing in 2029 is trading at just 32 cents, distressed levels that are often associated with an imminent bankruptcy filing. 

Wedbush downgraded Carvana to Underperform from Neutral on Wednesday in response to the Bloomberg report of creditors teaming up. The investment firm said the recent development increases bankruptcy risks as the company suffers from declining sales and expanding losses. Carvana has been negatively exposed to falling used car prices, which reduced the value of its held car inventory considerably. 

"We believe these developments indicate a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario (pre-packaged or otherwise), or highly diluted in a best case," Wedbush analyst Seth Basham said.

Carvana's downfall has been steep. The stock hit a record low of $3.71 in early Wednesday trades, representing a 99% decline from its 2021 high of $376.83. Wedbush lowered its price target on the stock to $1 from $9. 

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