I won’t pretend to be an expert here, I just found this situation indicative of the unwind in speculative excess of 2020/2021, again.
Carvana can either be described to be the most amazing thing or an absolute dumpster fire. We sold our dented car to Carvana at peak pricing and it was driven off without a hard look or a turn of the key.
This week, as I understand, Carvana looked for financing for its purchase of a physical car auction business from KAR. The bond deal ended up failing to close until the founder(s) backstopped the senior unsecured bond deal with ~$1.6B of their own money. Furthermore, the terms included a “make whole” provision and no prepayment for an unusual duration (I believe 5 yrs). Meaning the bondholder of this deal is owed principal plus all the interest for the term of the bond if the company goes bankrupt tomorrow. Essentially the bondholder is owed far more than they loaned – “priming” or devaluing the potential business value ascribed to junior bondholders and / or equity.
Carvana is a growth fund hotel – with none other than Tiger Global as a big representative on the cap table :
Enter Apollo. They have been involved with Carvana on both debt and equity in the past. To the extent that they are impaired, I have no idea. But just as news broke yesterday of the founders, the Garcias, buying the “rip your face off” bond deal another bombshell dropped.
The WSJ broke the story that Apollo backstopped another $1.6B of the broken bond deal. This person said it best:
Apollo is the most notorious “loan to own” shop in the business. Make no mistake, the odds that the equity is zero’d out in bankruptcy and Apollo takes control of Carvana are non-zero. Furthermore, those on Twitter had interesting commentary that Apollo may take control in Ch. 11, restructure the business to exclude the bad underwriting that was done prior, bring the “good Carvana” back to the public while being the prime financing vehicle for the business via its annuities business (a similar playbook, though not the same, was executed on Hertz).
Who knows what will transpire in the coming months, but Carvana was one of the many poster children of the Covid era growth boom and their drive to glory is coming to an abrupt fork in the road.
Disclosure: We own shares in Apollo, this is not investment advice. Do your own work.