Carvana plunges after Wedbush says bankruptcy risk rising

Shares of Carvana Co. fell 40% in morning trade on Wednesday after Wedbush raised the possibility of a debt default by the used-car retailer, which would increase the risk of bankruptcy, and cut its price target to a Wall Street low of $1.

Brokerage Wedbush also downgraded its rating on the stock to ‘underperform’ from ‘neutral,’ sending Carvana’s shares to a record low.

“Many (Carvana) bonds have been trading at about 50 cents on the dollar, indicating investors see a high probability of default,” said analyst Seth Basham in a note titled ‘Bankruptcy risk rising.’

Carvana’s bonds have been under pressure this year, with notes maturing in 2025 trading at 45 cents on the dollar, slightly above the record low of 40 cents a month earlier. They were trading at 97 cents on the dollar at the start of the year.

Meanwhile, the yield stood at 39.82%, according to Refinitiv data. In comparison, the 5-year U.S. Treasury notes yield was at 3.7171%.

On Tuesday, Bloomberg News reported that some of Carvana’s largest creditors, including Apollo Global Management Inc and Pacific Investment Management Co, have signed a cooperation agreement to act together in restructuring negotiations.

With the departure of Carvana’s director of investor relations, Wedbush believed the developments indicate a higher likelihood of debt restructuring that could “leave the equity worthless in a bankruptcy scenario, or highly diluted at best.”

Carvana has suffered from waning used-car demand and high costs, forcing it to undertake job cuts to rein in expenses. Last month, it cut about 1500 employees, or 8% of its workforce, in the latest round of job cuts this year.

As a result, its stock has fallen nearly 100% this year, hitting record lows.