Starting off the year at $4.63 per share, Carvana (NYSE:CVNA) stock has gone on an absolutely incredible ride. At the time of writing, CVNA stock has seen gains of more than 1,000% in 2023, now sitting above $47 per share.
However, it’s worth noting that this move includes a 15% decline today in Carvana’s share price, partially due to a bearish note from S&P Global Ratings. The ratings agency lowered its credit rating for Carvana following a debt deal that would restructure $4.3 billion of the company’s senior secured notes.
This restructuring would effectively push out the maturities of its debt and significantly reduce the amount of interest paid over the life of this debt. As fellow InvestorPlace contributor Dana Blankenhorn points out, that was previously a reason for investors to get giddy on the stock.
However, the ratings agency highlighted today that this deal effectively amounts to a default, since the principal amount agreed to in this restructuring would be “lower than originally promised.” Additionally, S&P Global Ratings noted that “debtholders are essentially being primed by the senior position of the new notes. In our view, Carvana is pursuing this transaction because its capital structure is unsustainable and the company has limited options to reduce its debt burden and improve its cash flow organically.”
Let’s dive into what this means for investors in this speculative growth stock.
CVNA Stock Dips On Credit Rating Downgrade
A credit rating downgrade is never a good thing. In this case, the move to CC from CCC (and a potential further lowering to D, or default level following the completion of this exchange) is perhaps far more worrisome.
That’s because a D credit rating essentially implies the company is bankrupt, or will be very shortly. By accepting what appear to be very favorable terms for Carvana, debt holders appear to be taking the view that the company won’t likely make it over the long term. The market has spoken, and the ratings agency appears to be taking its cue accordingly.
Thus, today’s announcement is one that makes sense. Some investors may wonder why a surging stock price and a debt restructuring deal that takes advantage of this surge is a bad thing. It’s not, at least on its face. But as many investors know, debt investors tend to be the “smart money” in the room, and they’ve spoken. Carvana’s capital structure appears to be unsustainable, and while these moves may provide some breathing room in the near term, S&P Global Ratings points out that such a move may simply be masking deeper issues investors should be concerned about.
In this case, S&P Global appears to be doing what it’s supposed to — raising alarm bells and cautioning investors with respect to the risks of a given stock. Whether or not speculators will listen is another story.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
