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Carvana raises cash without scrutiny
December 4, 2017 / 8:00 PM / 13 days ago

Carvana raises cash without scrutiny

Dec 4 (IFR) - Fast-growing used car retailer Carvana raised US$100m through the private sale of convertible preferred securities on Monday, a deal that allowed the listed company to avert public scrutiny.

The sale - which clearly cheered the markets, sending Carvana’s shares up nearly 11% to US$19.84 - came after the company went public in April with 15m shares at US$15 each.

Some 10.3m of the shares floated on the IPO are on loan to short-sellers, however. A regular follow-on offering would have required an SEC filing and a two-day viewing period.

“No stock-borrow - it would have been hard to do a regular-way public (convertible bond),” said one banker close to the situation.

“It’s one of those things that makes sense in a private context.”

The convertible bond was sold under section 4(a)(2) exemption of registration requirements, similar to Rule 144 but placing more responsibility on buyers.

Dundon Capital Partners, the private-equity firm headed by former Santander Consumer USA chief executive Tom Dundon, was the sole purchaser.

Citigroup and Wells Fargo advised Carvana.

The convertible preferred carries a 5.5% dividend and is convertible at a 10% premium, the minimum threshold required to make it distinct from the underlying common shares.

The CB is eligible to convert at US$19.69 – expensive, given a break-even period of just 1.8 years, but highlighting the benefit of eliminating market risks.

Carvana can force conversion after one year, but only if its shares are trading above US$29.54, a 150% premium to the base conversion price.

THE HIGH ROAD

Carvana has repeatedly defied the market’s expectations since going public.

Growth has been faster than planned - it recently opened its 40th location.

That expansion is causing operating losses to mount, and Carvana is now guiding toward negative adjusted Ebitda this year of 16.4%–17%, from 14%–16% ahead of the Q3 earnings November 7.

In the third quarter, it reported negative US$35.8m of adjusted Ebitda on revenue of US$225.4m, a minus 15.9% margin and up from negative US$33.4m and US$209.4m, respectively, in the second quarter.

“This is effectively an equity raise at a much more attractive level than feared by some, and well above the company’s $15 IPO price earlier this year,” said Wedbush analyst Seth Basham in a note to clients, noting that the raise “likely is leading to short covering”.

“The fresh capital removes a key growth constraint but does not likely give the company a pass in the minds of investors to show much less progress on the path to profitability,” said Basham, who increased his price target from $14 to $19 but maintained a neutral rating.

The sizable cash burn has drawn the ire of short-sellers – on Basham’s estimates (and consensus), Carvana is not expected to post break-even Ebitda until the first quarter of 2019.

Carvana finished the third quarter with US$103.5m of unrestricted cash, down from US$144.4m at the end of the second quarter.

Since then, however, it inked an increase to its auto finance receivables facility by US$1.4bn to US$2bn and entered into a sale-leaseback on auto vending machines of up to US$75m.

“From my perspective they are more likely to break even with this (financing) and the other forms of financing they have in place,” Basham told IFR.

“They are creating a frictionless environment for consumers to purchase cars. They offer a lot of the same elements as CarMax but without salespeople.”

Carvana allows customers to buy cars online, finance the purchase online and receive delivery or pickup from vending machine-like towers. (Reporting by Stephen Lacey; Editing by Marc Carnegie)

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