Carvana Co.’s bondholders could run against a “tough combination” of rising interest rates and double-digit financing costs, leading some consumers to tap the brakes on buying a used car.
That’s from Glenn Reynolds, founder and editor of Macro4Micro and founder and former CEO of research firm CreditSights, in a note Tuesday.
Reynolds also sees further uncertainty in the used-car market fueled by “scarce supply” that could get scarcer amid the ongoing United Auto Workers strike and the potential for new-car sales disruptions slowing trade-ins.
Carvana
CVNA,
in July reached an agreement with its bondholders to reduce its debt load, and the stock has skyrocketed more than 700% so far this year on the expectation the online used-car retailer has staved off bankruptcy. In comparison, the S&P 500 index
SPX
has advanced around 14% year to date.
“For Carvana bondholders, watching the wild price action in [Carvana stocks] was in part a sporting activity (more like Las Vegas), but relative serenity has been seen on the bond pricing side with the exchange offer,” Reynolds said.
“Bondholders as a group have worked together to manage their own destiny while [Carvana] stock has been more about speculation around what might be short squeeze effects, what might be long term value seekers with a view, and what could just be meme stock players on a bender.”
The bondholder group “clearly sees value in the asset mix and franchise,” Reynolds said. “They also saw a company that was not financially viable. They in effect see a floor scenario and can plan on the other side if the company execution or markets preclude the upside outcome.”
If the company controls cost and manages margins while also “materially” growing volumes, the profit growth story will get much better, the analyst said.
Where it could get into trouble is on volumes, he said. Besides the tight supply situation, there are “worsening headwinds” on the volume side, including higher interest rates making used-car less affordable, less credit being available, and “intense competition” for used cars among auto retailers.
“The good news for CVNA bondholders is that they are well organized and would easily control any restructuring that would come down the pike,” Reynolds said.
As the following chart from data solutions provider BondCliq Media Services shows, Carvana’s bonds have seen fairly equal flows between buying and selling over the last 10 days.
Carvana is expected to report third-quarter earnings in early November, with volumes numbers “one to focus on as well – not just their unit margin pitch,” he said.
Carvana has twice boosted its quarterly outlook, most recently in August.
See also: Carvana’s debt restructuring is good news, but its losses are ‘hardly in the growth stock handbook,’ analyst says
Read the full article here
