NEW YORK (S&P Global Ratings) March 23, 2023--S&P Global Ratings today took the rating actions listed above.
We view the proposed exchange offer as distressed and tantamount to default.
The downgrade follows Carvana's announcement that it commenced offers to exchange its outstanding existing notes for up to an aggregate principal amount of $1 billion of new 9.0%/12.0% cash/payment-in-kind (PIK) toggle senior secured second-lien notes due 2028. The new notes and guarantees will be secured by second-priority liens on certain assets and property owned by Carvana LLC, which the Ally Parties were granted a first-priority perfected security interest. The new notes and guarantees will be effectively senior to all existing and future unsecured debt.
The proposed transaction will somewhat extend the company's maturities and offer some cash interest cost savings due to the PIK option.
However, we view the proposed exchange offer as tantamount to default because we believe lenders will receive less than originally promised as the principal amount of the new securities offered is less than the original par amount, the new maturities extend beyond the original, and the timing of payments will be slower by adding a payment-in-kind feature for more than half the interest on the proposed notes. In addition, all existing debt holders 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.
The negative outlook reflects our expectation that we will lower the issuer credit rating on Carvana to 'D' when the proposed exchange offer is completed.
We will likely lower the issuer credit rating to 'D' when the proposed exchange offer is completed. Shortly after restructuring, we would raise the ratings to a level that reflects the ongoing risk of a conventional default or future distressed restructurings.
While unlikely, we could raise the issuer credit rating if Carvana does not complete the proposed exchange offer and the company establishes a clear plan to avoid any future debt restructuring.
ESG credit indicators: E-2, S-3, G-3
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
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