Carvana shares surge 40% after used

By Nathan Gomes

(Reuters) -Carvana's shares soared as much as 40% in premarket trading on MT4 trading platform official websiteWednesday after the troubled used-car retailer struck a deal with most of its term bondholders to cut its outstanding debt by more than $1 billion.

The agreement, with a group including private equity firm Apollo, eases some of the liquidity concerns hanging over Carvana, which has been reeling under a slump in demand for used cars.

"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.

As of the end of June, Carvana had long-term debt of $6.54 billion, nearly the same as the year-ago figure of $6.57 billion.

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.

But the company has been struggling to sell cars acquired at elevated prices as buyers, hit by inflation and worried about a recession, cut spending.

Carvana's shares have lost 87% of their value in the past two years. The company's current market capitalization is $7.5 billion, well below the $60 billion it commanded in 2021.

In order to strengthen its balance sheet and attain positive cash flow, the company has been trimming inventory and slashing advertising expenses.

Carvana said on Wednesday it would attempt to raise up to $1 billion through a stock sale.

SHORT SQUEEZE?

In premarket trading on Wednesday, Carvana's shares rose as high as $57, in what traders said looked like a short squeeze.

About 54% of Carvana's publicly available shares were being shorted as of July 18, per estimates from analytics firm Ortex.

Short-sellers borrow shares to bet on a stock falling, but if the opposite happens, they may have to quickly buy shares back to avoid further losses, exacerbating a rally.

"Some people were (selling) the stock last night expecting they're going to warn. They didn't warn - they actually beat and the numbers were pretty good," said Dennis Dick, market structure analyst at Triple D Trading.

Carvana's quarterly revenue came in at $2.98 billion, surpassing Wall Street's average expectation for $2.59 billion.

Analysts have been concerned about Carvana's financial health as the slump in vehicle demand collided with a $2.2 billion debt-funded deal to buy auto auction house Adesa.

The latest debt agreement will eliminate more than 83% of Carvana's unsecured notes maturing in 2025 and 2027 and lower required cash interest expense by over $430 million per year for the next two years. The noteholders will now receive new notes secured by Carvana and Adesa assets.

Carvana's second-quarter net loss narrowed to $58 million, or 55 cents per class A share, from $238 million, or $2.35 per class A share, a year earlier. Analysts, on average, had expected the company to post a loss of $1.15 per share.

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