Investor Dialogue: Carvana Liquidity & Finance GPU

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  • Why Carvana’s non-prime loans perform better than loans originated by indirect lenders
  • The big risk for CVNA equity is if the securitisation market freezes and CVNA can’t recycle loans
  • 10 of 19 IRC’s acquired from ADESA are in existing markets which can ramp quickly
  • How the ADESA acquisition could be FCF accretive from capex decreases
  • Discussion on the possibility of Garcias taking CVNA private
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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Analyst 1: The question is – and we need some clarification here – as a result of the recent transaction that happened, Carvana took on some debt. They had to give pretty good terms to the debt holders and, from the press releases, it wasn’t clear whether the Garcias were part of the debt-holding group but I guess, it has been confirmed they are not, so their interests are still 100% aligned with the shareholders.

Is that why they raised the additional equity?

Analyst 1: Yes, they did raise additional equity. I think it was at $80.

Analyst 2: I think there was a rumor that the Garcias were going to buy half the debt deal but then it came out that it was Apollo instead. I believe the company confirmed that the Garcias did not purchase the debt at all. I can’t remember where it was, but I saw something where someone confirmed it; but l believe that came out.

Is that also why the Garcias seem to have arranged an additional one billion in equity, on top of the original transaction?

Analyst 2: It was supposed to be structured as a billion of common, $2.275 billion of high yield and then a billion of preferred equity, on top. Apparently, they were marketing a 14% preferred PIK, which is crazy. Instead, they did $1.25 billion of common at $80 and $3.275 billion to 10.25% bonds. They scrapped the preferred and did that billion in high yield, instead.

Did Apollo take half of that?

Analyst 2: They took $1.6 billion. The chatter in the market is that, if Apollo hadn’t come in, they would have had to price it at 11% or 11.5%; kind of where they are trading now. Apollo could have taken the anchor position and driven the yield down a little bit. But I wish I could own some of that paper. 10.25 with full make-whole provision, no call provision, on eight years of interest; it’s pretty sweet.

Analyst 1: If they could have offered shareholders the right to buy a package of debt and equity, that would have been an interesting shareholder friendly way to do stuff. But stuff moves fast and you don’t have time.

Analyst 2: I don’t think it’s moved faster besides Covid, since the initial lockdown. They tapped the market at what couldn’t have been a worse time for their kind of company. The market has been pricing growth capital at 50%.

Analyst 1: Then you mix that in with a good portion of the customer base being sub-prime, and this bump up in interest rates is probably going to make a lot of them be in the situation where they can’t afford cars. I talked, today, with a guy in a local credit union and he said they are still pricing car loans at 2.5%, so it hasn’t quite reached through to the car loan market but. He says, right now, they are making 2.5% versus 5.5% for mortgages. As interest rates go up, it’s going to flow through to the sub-prime guys.

They are charging the sub-prime guys a high percentage anyway and I don’t know how much more it’s going to continue to go up or if it’s going to be more about hitting the prime guys, in terms of the interest rate increase. I’m not familiar with that market.

Analyst 2: Their sub-prime securitizations are at 19% and their prime is at 8.2%, which is already a pretty nice premium versus normal prime lending rates.

Analyst 3: I have a question. Do you know why Carvana shows to not make use of the committed facility? When they announced the ADESA acquisition, they said they had a committed facility in place, with JP Morgan and Citi but then, later, chose to go outside to the market, which led to this Apollo deal and the change, in terms of the structure. Do you know what caused them to do that?

Analyst 2: I have the same question. My assumption was duration.

Analyst 1: I was assuming it was bridge financing. What happens in a lot of deals is that guys will come in and do a bridge, just to get them through and the idea is then to refinance it on the other end.

Analyst 3: Was the committed financing just a short-term bridge and was always just meant to be a matter of a few weeks or maybe months? Was it always planned to go out to the market afterwards?

Analyst 2: That was my understanding.

Analyst 3: This comes from IR and, apparently, they had agreed a cap, which is undisclosed, with JP Morgan and Citi. They tried to come in lower than that. Since they haven’t gone back to those two banks, who would have taken up the difference, I assume that their initial terms were even higher than 10.25%?

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