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.
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)