Amid a see-saw of news items with conflicting implications, online used-car retailer Carvana (NYSE:CVNA) suffered a significant setback regarding its efforts to rein in debt. According to a Bloomberg report, Carvana canceled a $1 billion debt swap after creditors refused to exchange their notes. CVNA stock incurred choppy trading, slipping about 2% in the afternoon session.
Per the news agency, “[t]he online automobile seller failed to convince holders of at least $500 million of notes to participate in the exchange offer before the deal expired.” Marking a heavy blow, Carvana earlier attempted to sweeten the deal’s terms. Management also repeatedly extended the timeline in an effort to spark investor participation.
Last year, a group of debt holders, including Apollo Global Management and Pacific Investment Management, cooperated to attempt negotiations with Carvana to prepare for a restructuring. Earlier in March, Carvana first launched a debt exchange deal. However, the cohort opposed the exchange, with some lenders countering with alternative deals.
Profitability Concerns Weigh on CVNA Stock
The matter represents a frustrating challenge for CVNA stock. Just yesterday, shares popped higher as the company received a credit rating upgrade for its securitization loss assumptions. On paper, the news implied a stronger-than-expected consumer base.
Despite the positives associated with Carvana — after all, CVNA stock is up more than 233% so far this year — money managers remain focused on its headwinds. Primarily, Carvana’s $8.7 billion debt load drags down profitability.
For example, during the first quarter of 2023, Carvana reported narrower-than-expected losses. Unfortunately, the company still lost more than $4,000 on every car it sold.
Moreover, Bloomberg specified that “[h]alf of the per-car loss is in interest payments, which means that even management’s plan to slash costs can only go so far to stanch red ink.”
Better Opportunities Available
Fundamentally, what holds back CVNA stock is underlying weaknesses in the consumer economy. With higher interest rates and stubbornly high inflation imposing a steeper net cost on car buyers who finance, Carvana can only do so much.
And on a related note, investors have better opportunities than gambling on high-risk enterprises. In particular, if interest rates continue to rise — a not-entirely absurd proposition given the latest hot jobs report — safe debt-related investments may offer enough rewards to overshadow their far riskier counterparts. Therefore, investors need to be cautious about CVNA stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
