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Shares of Carvana surged Wednesday after the used-car retailer made a deal with some of its bondholders to cut more than $1 billion in outstanding debt.
The agreement, with a group that includes private equity firm Apollo, is expected to ease some of Carvana’s liquidity concerns amid weakening demand for used cars. Carvana’s long-term debt reached $6.54 billion by the end of June.
A computer monitor displayed available vehicles inside the Carvana Co. car vending machine in Frisco, Texas, on June 8, 2017. (Photographer: Laura Buckman/Bloomberg via Getty Images / Getty Images)
"Apollo is pleased to support this debt exchange agreement, which stands to significantly strengthen Carvana's financial position while providing creditors with new first lien debt," John Zito, Apollo's deputy CIO of credit, said in a statement.
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Despite Carvana’s outstanding debt and the dip in consumer demand for used cars, shares are up more than 1,000% since Jan. 1.
Meanwhile, analysts at JPMorgan Chase moved their position on Carvana from neutral to underweight, saying they "believe valuation has once again disconnected materially from fundamentals."
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"The primary debate on Carvana shares over the last nine months has been less about long term business model fundamentals and more about liquidity and ability to buy duration through a potential recession and prolonged weakness in used cars," the analysts wrote.
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JPMorgan downgraded the stock from neutral to underweight because bank analysts don’t believe Carvana can maintain the rally and will eventually generate below-average returns compared to the benchmark.
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Carvana has struggled to sell cars at higher prices as buyers cut spending, due to inflationary pressures and worries over a recession. To strengthen its balance sheet and attain positive cash flow, the company has been trimming inventory and slashing advertising expenses.
The company's current market capitalization is $7.5 billion, well below the $60 billion it commanded in 2021. Carvana said Wednesday that it would attempt to raise up to $1 billion through a stock sale.
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Carvana, which allows customers to buy cars online, became popular during the COVID-19 pandemic, as people opted for readily available used cars instead of newer vehicles whose supply was constrained due to semiconductor shortages.
Reuters contributed to this report.