Carvana is facing a cash crunch from high debt and high interest rates

Few companies have been hit more High interest rates from Carvana. The company’s interest expense nearly doubled early this year when it was I paid for financing for acquisition. The cost of financing auto purchases has risen by three-quarters this year, and some of its real estate has lost value. Car buyers, meanwhile, They delay purchases Hopefully rates will drop.

In a memo to Carvana employees announcing the layoffs, CEO Ernie Garcia III blamed the uncertain economic environment that he said is particularly harsh on fast-growing companies selling products affected by higher interest rates. “We failed to accurately predict how all of this would happen and its impact on our business,” he said.

The company said it has millions of satisfied customers, and disrupting the auto industry is no easy feat. “We’ve seen many e-commerce companies delist early in their journey just to become market leaders. We plan to follow suit,” a spokesperson said. Earlier this month, Carvana executives said cash flow and profitability were a focus. strategic now.

I became a carvana It is very popular among car buyers, with heavy advertisements and bargain-free cars delivered to their doorsteps. Investors bought the shares, sending shares more than sixfold higher. The stock is down more than 97% from its peak last year. Carvana bonds are traded in Sad levels.

Daniel Embrow, managing director of Stephens Inc.

Ratings firm S&P Global Ratings warned that Carvana’s liquidity was likely to erode faster than expected, and changed its CCC+ rating outlook to negative earlier this month. It said the company’s position to raise more liquidity from equity and bond investors had deteriorated.

Less than a year ago, Carvana was still trying to keep up with demand. In February, I agreed to buy Car auction business It would help increase inventory. However, car sales slowed.

On the day the deal closed in May, Mr. Garcia said it had outgrown and lay off 2,500 workers. A few days ago, it issued $3.275 billion worth of bonds with a coupon of 10.25% to finance the purchase. The high coupon nearly doubled Carvana’s annual interest expense and reflected investor fears of a recession and High inflation.

Carvana thrived when interest rates were low because it could borrow cheaply to buy cars and make loans to customers. its credit limit from

Financial Ally

Car purchases had an average interest rate of 2.6% last year, compared to 4.5% at the end of September. Ally asked Carvana to set aside 12.5% ​​of the borrowed amount in late September, up from 7.5%, further tightening its cash position. A spokesman for the ally declined to comment.

Carvana has made big profits selling its auto loans to investors hungry for return. Loan gains help Carvana offset losses incurred from the sale of cars. When investors became more picky about these securities in the spring, Carvana sold several loans to Ally instead, on less favorable terms. Gains from loan sales fell by about a third in the third quarter compared to the same period last year.

Mr. Garcia told analysts on a phone call Nov. 3 that the company will continue to cut costs and that it has access to about $4 billion in liquidity, as well as $316 million in cash and some other assets. The amount includes what can be borrowed on lines of credit to buy cars and make loans. It also included about $2 billion in real estate, which is not normally considered a liquid asset.

The company’s chief financial officer said Carvana could borrow against real estate, which includes the sites it bought this year. It previously made about $500 million selling some sites where it inspects cars and then leases them back for 20 or 25 years.

Analysts said the move could work, but it would also add expenses. They said any real estate deals would likely happen piecemeal over time, or involve high rent payments because of Carvana’s credit problems.

Long-term leases in space generally rely on financially sound tenants who can be expected to make their lease payments for years, said Scott Merkle, managing partner at SLB Capital Advisors, which specializes in sale and leaseback transactions. He said general conditions for sellers have softened in this market due to higher interest rates, but sales and leasebacks still provide a better cost of capital for companies than other financing.

Some Carvana rental properties have received a lukewarm response in the market. The 12-story “home” car vending machine in Atlanta that Carvana sold and rented back in December has been put back into use this summer. It is still on the market, and the asking price has been lowered since then.

Carvana said it is testing ways to make more car sales, such as collecting payment before delivery and having customers pick up the cars from its vending machines.

“We have a group of committed liquidity. We have a group of real estate, and I think we feel that positions us well to weather this storm,” Mr. Garcia told analysts on the November 3 call.

Ben Foldy, Will Foer, and Ben Eisen contributed to this article.

Write to Margot Patrick at [email protected] and Kristin Broughton at [email protected]