Investing.com -- Moody’s Ratings has upgraded the corporate family rating (CFR) of Carvana Co (NYSE: CVNA ). to B3 from Caa1, according to an announcement made on March 27, 2025. The probability of default rating (PDR) has also been upgraded to B3-PD from Caa1-PD. Carvana’s senior secured global notes ratings and senior unsecured global notes ratings were raised to B3 and Caa2 respectively, from their previous rating of Caa1. The speculative grade liquidity rating (SGL) was lifted to SGL-2 from SGL-3. Moody’s maintained a positive outlook for the company.
The upgrade and positive outlook are attributed to Carvana’s improved operating performance and voluntary debt reduction, which have led to a considerable improvement in credit metrics. The company’s liquidity position has also seen a significant boost due to a substantial increase in its cash balances in fiscal 2024. Carvana is projected to maintain a positive free cash flow even after reverting to fully cash paying its interest expense. As of December 31, 2024, the company’s debt to EBITDA improved to around 4.2x, while EBITDA less capital expenditures to interest was approximately 1.8x. This is a notable improvement from the leverage of 18.8x and EBIT to interest coverage of about (-0.4x) at the end of fiscal 2023.
Carvana’s liquidity has been fortified in part by the significant benefit of not having to pay cash interest on the majority of its capital structure and the issuance of approximately $1.26 billion of common equity.
The B3 CFR reflects Carvana’s enhanced operating performance, driven by higher unit sales, a significant improvement in retail vehicle gross profit per vehicle, a $755 million gain from the sale of receivables, and a more focused approach to cost control. Over the past several quarters, Carvana generated positive operating earnings, which, along with the material benefit of not having to pay cash interest on the substantial majority of its capital structure and the ability to sell its receivables for a substantial gain, has improved its liquidity with positive free cash flow.
As of December 31, 2024, Carvana held an unrestricted cash balance of about $1.7 billion, which was boosted by a $1.26 billion equity offering. Part of the proceeds was used to pay down outstanding debt. Carvana’s non-cash pay-in-kind (PIK) interest for the year ending December 31, 2024, was about $450 million. The company is expected to transition to entirely cash pay in August 2025.
The positive outlook anticipates Carvana to maintain a consistent level of operating performance that will enable it to sustain its earnings momentum and convert interest expense to entirely cash pay while simultaneously improving credit metrics and maintaining at least good liquidity.
Ratings could be upgraded if Carvana can sustain its current operating performance improvement, including maintaining its current level of retail gross profit per vehicle and generate free cash flow while maintaining good liquidity. A downgrade could occur if operating performance weakens or financial policies become more aggressive. A deterioration in liquidity for any reason could also result in a negative rating action.
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