Used-car dealer Carvana Co. hired a financial adviser and the company’s creditors banded together to protect themselves, according to people familiar with the matter, while the company’s shares plunged on fears it is headed for a restructuring.
Carvana’s stock closed down 43% to $3.85 a share Wednesday following reports that the company’s creditors had signed cooperation agreements with each other in anticipation of a potential new capital raise. The creditor group, including Apollo Global Management Inc., Pacific Investment Management Co. and Ares Management Corp., signed a three-month cooperation agreement as a defensive move to ensure they act in unison if the company attempts to borrow new debt, according to people familiar with the matter.
Carvana also hired Moelis & Co. as a financial adviser, tapping a top investment bank for companies facing financial headwinds, according to people familiar with the matter.
The cooperation agreement covers Carvana bondholders holding around $4 billion in debt, or around 70% of the company’s total debt, and aims to block any coercive transactions that could pit creditors against each other, according to people familiar with the matter.
The bondholder deal, earlier reported by Bloomberg News, doesn’t mean that a bankruptcy filing is imminent, the people said.
In addition to Moelis, Carvana is working with its legal counsel, Kirkland & Ellis LLP, to evaluate restructuring options, the people familiar with the matter said. Kirkland didn’t respond to a request for comment.
Lenders have been increasingly pitted against one another in contentious debt restructurings in recent years, including those of Revlon Inc., KKR & Co.-owned Envision Healthcare and Bausch Health Cos. More companies have used flexible debt agreements to raise new debt from majorities of their lenders, sometimes to the detriment of the excluded minority.
“One of the main dynamics in high-profile restructurings over the last few years has been creditor-on-creditor violence,” said Steven Hunter, chief executive at 9fin, a credit analytics platform. “It appears that the lenders want to present a united front and avoid having the company pursue a coercive type of restructuring.”
Reports of the creditor pact led Wedbush Securities analyst Seth Basham to drop his price target for Carvana’s stock to $1 from $9 on Wednesday.
“We believe these developments [indicate] a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario…or highly diluted in a best case,” Mr. Basham wrote.
Some Carvana creditors who signed the cooperation agreement have themselves been involved in contentious deals. Ares was a member of a creditor group that lent to Revlon in 2020 against intellectual property assets that had previously been pledged to a different group of lenders. Pimco backed a similar transaction for Envision that moved collateral away from other lenders earlier this year.
Jeffrey Brown, CEO of Ally Financial Inc., which finances Carvana’s inventory and purchases some of the loans it generates, said at an investor conference Tuesday that his bank was in steady contact with Carvana CEO Ernie Garcia and his leadership team.
“Unless there was fraud, which we don’t believe, Ernie runs a very good shop, very clean shop,” Mr. Brown said. “We look at them as a very reasonable, responsible partner.”
Carvana was a highflier during the pandemic when use of its online platform exploded. The company focused on growth over profitability, and has only posted a single quarter of $22 million profit in the second quarter of 2021 against net losses of $781 million in the first three quarters of 2022 alone.
A focus on market expansion led the company to acquire the physical auction business of Adesa U.S. for $2.2 billion in February, which Carvana said would increase its capacity for turning over cars for sale and widen its nationwide footprint.
But the company struggled to find the financing to close the acquisition after reporting its first-ever quarterly decline in sales and a more-than-sixfold increase in net losses compared with a year earlier.
Carvana turned to Apollo, which agreed in April to purchase about half of $3.3 billion of bonds Carvana issued to buy Adesa. The bonds had a coupon of 10.25%, a yield well above average for most junk bonds, and almost doubled Carvana’s annual interest expense. The company’s bonds now trade at distressed levels, and it laid off about 1,500 people last month.
—Alexander Gladstone, Soma Biswas and Will Feuer contributed to this article.
Write to Alexander Saeedy at alexander.saeedy@wsj.com and Ben Foldy at ben.foldy@wsj.com
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