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  "documentTitle": "Carvana Co. (CVNA)",
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  "authorName": "Kerrisdale Capital",
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  "presentationDate": "2023-06-15 00:00:00",
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      "text": "Carvana management likes to say that it currently has access to $1.5bn in total committed liquidity (excluding unpledged real estate assets). In reality, of this amount, only $488m as of 1Q23 is cash on hand with the balance primarily short-term revolving capacity available only for financing vehicle inventory and funding customer loans.",
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      "text": "Then, in March 2022, macro and market conditions changed. The Fed began aggressively raising rates to combat inflation and used car loan rates followed suit. Vehicle affordability fell, and used vehicle sales across the industry slowed and ended down -11% y/y in 2022. The used car market continues to experience challenges related to affordability and supply of vehicles, against a backdrop of souring consumer sentiment and rising recessionary fears. (See: Appendix I).",
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      "text": "Carvana management likes to say that it currently has access to $1.5bn in total committed liquidity (excluding unpledged real estate assets). In reality, of this amount, only $488m as of 1Q23 is cash on hand with the balance primarily short-term revolving capacity available only for financing vehicle inventory and funding customer loans. Carvana's interest costs and capex total over $700m.",
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      "text": "Carvana is a “controlled company” with a dual-class share structure. Class A shares hold economic interest and carry one vote. Class B are effectively similar but enjoy 10:1 super voting rights and are 100% owned by the Garcias (Ernest the CEO and his father). The Garcias together have approximately 88% voting power.",
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      "text": "Last spring, after misjudging the outlook for used car demand and making the disastrous decision to purchase additional logistics capacity with billions in high yield debt just as the used car market began rolling over, Carvana attempted to pivot from its historical focus on rapid growth to improving profitability. In fact, on the day the ADESA acquisition closed, Carvana announced plans to lay off 12% of its workforce. We estimate the effect of cost reductions, implementation of less consumer friendly changes to boost profitability, and drastic declines in vehicle affordability will result in 2Q23 total revenue down -33% and retail units down -34% y/y. Over the past year, Carvana has aggressively cut inventory -55%, slashed advertising expenses -64%, and fired over 20% of its workforce in a bid to staunch cash flow bleed and preserve declining liquidity.",
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      "text": "curtailed new car production limited supply), and inflation heated up across the entire economy, average used car prices witnessed a +40% rise versus pre-pandemic levels. The ripple effect of reduced new vehicle production (the ultimate source of used cars), along with a significant increase in the number of leased cars purchased outright by lessees, had caused used car inventories to fall to levels not seen in over a decade, particularly for lower-priced cars, Carvana's sweet spot.",
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      "text": "In March 2023, Carvana began attempts to restructure its liabilities, offering to exchange existing senior unsecured notes into a maximum of $1bn of new 2nd lien, 9% cash / 12% PIK, secured notes due 2028 at a discount. After twice extending the deadline for the offer, the exchange was cancelled on June 1st. In April, a Bloomberg article leaked details of counterproposals from bondholders involving new equity issuance and/or “substantial” debt-for-equity swaps. Carvana has apparently not engaged formally on any restructuring proposals from bondholders to date.",
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