Carvana (CVNA) PT Lowered to $5 at JPMorgan

JPMorgan analyst Rajat Gupta lowered the price target on Carvana (NYSE: CVNA) to $5.00 (from $10.00) while maintaining a Neutral rating.

The analyst comments "Yesterday, Bloomberg reported that some of CVNA’s largest creditors, that combined own ~70% (or ~$4 bn) of outstanding unsecured debt have signed a pact that binds them to act together in negotiations with the company for at least three months. In our view, the pact suggests that CVNA may have initiated debt restructuring negotiations with bond holders as there seems to be little end in sight for ongoing used car market weakness and management might be attempting to build cushion or flexibility. Given the heavy concentration of the debt among large holders and likely across the debt stack, it also increases the chances of a more holistic solution of liquidity and debt vs just piecemeal across the individual notes. The question is what is the pact’s intention? The bonds are trading between 32-46 cents on the dollar, but the first maturity is not until 2025; so, this pact is likely more about just making sure CVNA is not negotiating favorable terms (like maturity extension or attaching secured assets and reducing the debt stack) with any one or small group of holders. The biggest debate right now is if CVNA has enough cash runway in the near-term. As we have noted in the past, we believe CVNA has enough cushion through short-term revolvers to get through till end of 2023, and a severe recession could accelerate this by 1-2 quarters. So, what can the consortium agree to that can help CVNA get through this period? Couple possibilities we highlight in terms of outcomes: 1) Debt/equity exchange, including extension of maturities – lowers debt stack and interest expense but CVNA would still need liquidity; and 2) Secured debt exchange which include raising additional capital and extending maturities - helps with liquidity runway. To be clear, none of these outcomes favor the equity holder, but also reduces the likelihood for Ch. 11 filing in the near-term. In other news, fundamentals in the used car market remain weak with no respite on volumes and pricing moderating (but not falling off a cliff yet) and ABS spreads now wider than at the time of 3Q results. Relatedly, at an investor conference recently, partner ALLY noted that they have a high degree of confidence that CVNA will navigate through recent operational issues. They remain agnostic in terms of booking paper from diverse dealer partners as they primarily evaluate risk-return metrics and prior credit performance, which has tracked in-line with expectations on loans purchased from CVNA. Lastly, reiterating our view on near-term ‘liquid’ liquidity (Table ), CVNA has a $2.2 bn floorplan line (or ~$1.6 bn net liquidity after restricted cash) with ~$0.6 bn drawn, collateralized by ~$2.6 bn in inventory. Based on current floorplan debt (adjusting for further price correction) and inventory levels plus restricted cash, CVNA can draw up to an additional ~$1 bn and ~$1.4 bn including finance receivables capacity, and use it to fund operations. Adding $0.3 bn of cash on hand should provide liquidity runway until end of 2023 on our base case estimates "

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