Carvana Co CVNA shares are down more than 98% since the start of the year and one analyst firm said the stock was likely to remain in freefall.
What To Know: Wedbush on Wednesday downgraded Carvana from Neutral to Underperform and slashed the price target from $9 to $1, citing increased bankruptcy risks.
According to a Bloomberg report, a group of Carvana’s largest creditors signed a pact that binds them to act as a group in any negotiations with Carvana. The move aimed to prevent creditor fights that have complicated other debt restructurings in the past.
A group of funds holding around 70% of Carvana’s debt signed the cooperation agreement, which is set to remain in place for at least three months.
“Combined with the fact that many CVNA bonds have been trading at ~50 cents on the dollar, indicating investors see a high probability of default, we view this news negatively for the CVNA shares,” Wedbush analysts wrote in a new note to clients.
“We believe these developments indicate a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario.”
How It Happened: Carvana’s “ill-timed” acquisition of Adesa’s U.S. auction business earlier this year has put an “albatross around its neck,” the analyst firm said.
The best case scenario for Carvana is that the company’s equity becomes highly diluted, Wedbush added.
Related Link: A Look Into Carvana’s Debt
Previously, Wedbush saw bankruptcy as a low-probability risk, given the CEO’s equity position and capital resources. Furthermore, the company owns about $2 billion in real estate, which could be an alternative to a capital raise in the coming months.
“However, our understanding is that there could be conveyance issues with debt holders should CVNA attempt to monetize the real estate, making this a lower probability,” the analyst note said.
CVNA Price Action: Carvana shares are making new 52-week lows on Wednesday.
The stock was down 42.88% at $3.83 Wednesday afternoon, according to Benzinga Pro.
Read Also: Carvana Stock Is Crumbling: What’s Going On?
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