Carvana Co. is consulting with lawyers and investment bankers about options for managing its debt load as plunging used car prices and the company's swift cash burn threaten its future solvency.
The online car seller has spoken with advisers at Kirkland & Ellis and Moelis & Co., according to people with knowledge of the matter, who asked not to be identified talking about confidential discussions. Carvana is considering possibilities while some of its largest creditors are banding together to negotiate as a bloc with the company.
A spokesperson for Carvana didn't comment on the discussions with advisers. The company is not involved in any cooperative agreement between bondholders and is focused on efforts to becoming profitable, the person said. Representatives for Kirkland & Ellis and Moelis didn't comment.
Funds including Apollo Global Management Inc. and Pacific Investment Management Co. have signed a cooperation agreement, Bloomberg reported Tuesday. The holders have about $4 billion of Carvana's unsecured debt, or around 70 percent of the total outstanding, and the pact will last a minimum of three months.
Carvana's bonds have fallen below 45 cents on the dollar and have been at distressed levels for months, indicating that investors believe there's a high chance the company will default.
Its shares rebounded about 7.6 percent in premarket trading before U.S. exchanges opened on Thursday after dropping 43 percent on Wednesday to close at $3.83, an all-time low.
The company has posted net losses every quarter since it went public except for one, and its operating cash flow has been negative for every quarter except one.
Tempe, Arizona-based Carvana, a onetime hedge fund darling, has seen its stock plunge about 98 percent this year because of investor concerns over its long-term prospects.
Few companies benefited from the pandemic economy as much as Carvana. When Covid fears shuttered car dealerships around the country in 2020, consumers could go online to select a vehicle at Carvana and have it delivered to their doorstep. The company's shares rose 160% that year.
But used car prices have slumped this year, hurting Carvana's margins, while rising interest rates boost the cost of a car for consumers financing their purchases. Carvana said last month that it was cutting about 1,500 jobs, or 8 percent of its workforce, as it confronts the brutal math of its industry.
Seth Basham, an equity analyst at Wedbush, slashed his 12-month forecast for Carvana's share price to $1.
"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," Basham wrote in a note to clients.