Carvana (CVNA) Reality Check

The more things change, the more they stay the same...or worse

I was going to write this post a while ago, but with Carvana’s (CVNA) stock getting squeezed hard, right now it’s probably an even better time (and besides, I am in New Zealand, my internal clock is still somewhere in the U.S., and writing beats “staring” at the ceiling in the dark).

CVNA first squeeze back in July came on the heels of a debt restructuring which according to the company “slashed $1.3b of debt”. With more than 35% of the float short, it mattered not that the restructuring did nothing of the sort. What it did do, was literally to i) mortgage the company into oblivion, ii) jack up the interest rate the company has to pay, and iii) not reduce at all the principal amount it almost certainly will owe.

The first two items are easy to see from the company’s cheery press releases: the old unsecured bonds have been exchanged for first lien debt, and the cash coupon rates went from about 5% to 9%. But the real kick-in-the-ass is that the company has the “option” to pay-in-kind the interest for the first two years at an average PIK rate of 13%. If the company chooses that “option” (perhaps because there are few scenarios in which it will be able to make cash interest payments), the accrued PIK interest over the two years will be just about the $1.3b the company is so happy to have “reduced”.

Many smart twitter chartists have kept me from shorting the stock for the last several months, but with many shorts already torched, stiff resistance levels in the $55 zone, and DeMark upside exhaustion levels 2-3 weeks away from completing, the flip of the calendar to the new year might prove just too tempting.

And with that, back to “staring” at the ceiling in the dark.

No position…yet.