Carvana has an attractive business model a lot of investors like, but they have loaded their balance sheet with too much debt. Carvana is rated Caa2/CCC+ by Moody's and S&P — that is deep junk. They only rate bonds that low if they question the “sustainability” of their debt. They are raising $3B of unsecured bonds to pay for the acquisition of Adesa, a used car auction business. They are having to pay 10.25% for these bonds, which is really expensive money. Carvana is a negative EBITDA company that burns cash, so paying an additional $307MM (10.25% on $3B) in cash interest is going eat up even more cash flow.
Apollo is a premier private equity and distressed debt investor. There's a great book about Apollo's very aggressive tactics in the Caesar's Palace bankruptcy 7 years ago. Apollo is known for top level due diligence and is full of smart, aggressive alpha dogs in finance.
Carvana was having a tough time getting this $3B bond deal done in market. Apollo smelled opportunity and came in with a $1.6B order for the bonds and influenced the bond indenture terms to suit their interests (they are full of smart lawyers, too). Apollo is best at private equity and they obviously smell opportunity to own Carvana through their unsecured bonds they are buying if there is a Chapter 11 bankruptcy. S&P places a 51% chance of bankruptcy over 8 years on bonds they rate “CCC” or worse.
Apollo did this $1.6B bond and will earn 10.25% coupon payments through its 8 year life, which they will gladly take but I think they would prefer owning the equity of Carvana through a bankruptcy restructuring because that is their expertise. There are provisions in this bond that Apollo can utilize for their benefit which could be very bad to CVNA equity holders (you'd be diluted heavily in bankruptcy), so be careful on this one.
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