Carvana stock slides on bankruptcy risk

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Used car prices continue to climb as gas prices and supply chain backlogs drive up demand

With record gas prices and supply chain issues delaying new car production, more people are looking for cars with better mileage. That means more business for used car dealers.

Carvana shares are getting crushed on Wednesday over concerns the used car retailer may be forced into bankruptcy. 

The stock fell more than 30% after Wedbush analyst Seth Basham said "bankruptcy risk rising," noting a significant decline in the company's bonds. "We believe these developments indicates a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario (pre-packaged or otherwise), or highly diluted in a best case" he explained in his research note, which included a downgrade of the stock to underperform. 

Carvana

FOX Business' inquiries to Carvana were not immediately returned.

CARVANA TO SLASH 1,500 JOBS

During the earnings conference call last month, CEO Ernie Garcia declined to provide a 2023 forecast and outlined the challenges facing the company including lower demand, auto depreciation, the pressure to cut expenses and rapidly rising interest rates. 

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Vehicles sit inside the Carvana Co. car vending machine in Frisco, Texas (Laura Buckman/Bloomberg via Getty Images / Getty Images)

"Interest rates have risen rapidly with the two-year treasury a good benchmark for automotive loans rising 3.9% over the last year and 2.6% since 2019," he said. "In addition, credit spreads have risen about 1% in the last year" said Garcia. 

"To put this in perspective for a customer utilizing financing, the moves into your current yields plus credit spreads of last year are equivalent in their impacts on the customer's monthly payment of about a $3,000 price increase. As a result, for customers using financing, cars ended the quarter at their most unaffordable point ever, despite the fact that retail prices have dropped roughly 10% this year."

Additionally, the company slashed 1,500 workers or about 8% of its workforce last month. 

FLASHBACK AUGUST 2021: CARVANA CEO ERNIE GARCIA 

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Carvana CEO shares the company’s growth strategy

Carvana founder and CEO Ernie Garcia joins ‘Barron’s Roundtable’ to discuss the benefits of online-car shopping

Earlier in the week, Bloomberg reported creditors including Apollo and Pimco agreed to work in tandem if a restructuring is necessary. 

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