Shares of used car dealer Carvana (CVNA 7.31%), which have lost roughly 94% of their value over the past year, bounced back hard on Wednesday morning, rising 19.3% through 11 a.m. ET.
Investors are cheering a debt restructuring plan that the company announced this morning, whereby Carvana proposes to exchange a chunk of its long-term debt for up to $1 billion in new debt that won't come due for another five years.
The difference between Carvana's old debt and the new debt Carvana is proposing to issue -- "9%/12% Cash/PIK Toggle Senior Secured Second Lien Notes due 2028" -- is that the old debt is unsecured, while the new debt will be secured by "liens on certain assets and property owned by Carvana, LLC."
In total, $5.7 billion of old debt, with due dates ranging from 2025 through 2030 and interest rates from 4.875% to 10.25%, is eligible for trading in. Presumably, though, Carvana will be most interested in replacing its $500 million worth of senior notes paying 5.625% interest, and coming due just two years from now, in 2025; and its $600 million worth of senior notes paying 5.5% coming due in 2027.
The more of that 2025 and 2026 debt that Carvana can entice its lenders to trade in (in exchange for much higher interest rates), the better it will be for Carvana, giving it as much as four full years of breathing room before any of its big principal payments come due.
Carvana has imposed one key condition upon its debt exchange: At least $500 million worth of its debt-holders (but ideally more) must agree to exchange their notes, or no debt restructuring will happen.
Also worth pointing out is that Carvana is retaining the option of "paying" interest on its new notes (which have a nominal interest rate of 9%) in the form of issuing other notes that pay 12%, for the first three years after they're issued. Afterward, interest will be paid as usual, at the normal 9% interest rate.
So what's the upshot of all this, and why is it making shareholders happy today? Basically, Carvana is buying itself some time. Assuming the exchange proves popular (and I think it will), it will give Carvana several years in which to get its financial house in order, and reduce the risk of the entire company going insolvent and no one getting paid any interest if Carvana defaults.
That's good news for Carvana. That's why the stock is going up.