How Apollo’s Last-Minute Twist Salvaged Carvana’s Debt Sale

(Bloomberg) -- Carvana Co.'s bankers at JPMorgan Chase & Co. and Citigroup Inc. were in a bind. 

The bank duo were trying to sell a roughly $3.3 billion debt package to finance the used-car retailer's purchase of Adesa Inc.'s U.S. car-auction business -- a deal that would not only widen Carvana's geographic footprint, but also slash delivery times and boost production capacity.

But even best-laid plans can come up against obstacles. The deal was announced in February on the very same day that Russia invaded Ukraine -- hardly ideal conditions for steering a multi-billion dollar transaction. 

More bad news would soon follow. On April 20, Carvana saw its shares sink after disappointing first-quarter results. Its existing bonds were already yielding upwards of 9%.

By the time the deal came to market this week, conditions had deteriorated even more. Investors were demanding a yield of around 11% on a proposed $2.275 billion junk-bond and around 14% on a $1 billion preferred piece, according to people with knowledge of the matter. 

At those levels, JPMorgan and Citi were at risk of losing some of their fees on the deal, according to one of the people, who asked not to be identified when speaking about a private transaction.

That's when Apollo Global Management Inc. stepped in. 

The investing behemoth -- already a long-time investor in Carvana -- had originally proposed to buy $600 million of the offering across bonds and preferred shares. But as the transaction struggled, Apollo offered to boost its order to $1.6 billion -- roughly half of the entire financing -- in exchange for significant changes to the deal's structure. 

Carvana agreed to more investor-friendly provisions, and to replace the preferred with $1 billion of additional junk bonds. As part of the trade, Apollo also agreed to a lower yield of 10.25%, said the people.

Other investors including Pacific Investment Management Co. and Franklin Resources Inc. submitted large orders for the revamped structure, pushing total demand well beyond the bond's new $3.275 billion size, according to one of the people. Apollo ended up with an allocation of around $1 billion, while Pimco and Franklin bought hundreds of millions, the same person said.

Representatives for Apollo, Carvana, Citi, Franklin, JPMorgan and Pimco declined to comment.

Apollo's pivotal part in reshaping the Carvana package is testament to the role that its credit division, which manages over $350 billion, plays in markets. It can make or break multi-billion dollar financings. It also underscores how lines between broadly syndicated debt offerings and privately negotiated transactions are becoming increasingly blurred.

Among the changes that Apollo requested was a longer “non-call” period, which protects lenders from the risk that the debt could be refinanced at a lower rate, as well as a special provision that could significantly boost creditor claims in the event of a bankruptcy. 

The Carvana case is emblematic of a wider market dilemma, where companies that were able to sell the riskiest of junk bonds with ease just a few months ago are now struggling to attract buyers. Average yields on the lowest ranked debt -- in the CCC tier -- have doubled to 10.36% since July, according to data compiled by Bloomberg. 

U.S. junk bonds have lost 8.2% this year on a total returns basis as rising rates whack fixed-rate bonds, while sales of high-yield notes are running at their slowest pace in more than a decade as borrowers turn to other markets such as leveraged loans and private credit to help fund buyouts. 

©2022 Bloomberg L.P.