This was done in order to limit shareholders from raising their stakes.

Struggling used car retailer Carvana has settled on an agreement to limit shareholders from raising their stakes by selling up to $4 billion in auto loans. The company made the announcement earlier this week as it continues to struggle with not only debt but also legal issues surrounding several of its locations.

This shareholder rights plan is intended “to protect long-term shareholder value by preserving the availability of Carvana’s net operating loss (NOLs) carryforwards.” Ally Bank and Ally Financial will buy the loans as part of a greater effort to help the retailer restructure its overall operations. Doing so requires funding and those financial institutions are providing the breathing space Carvana desperately needs.

industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook

These NOLs could also be available to offset its future federal taxable income. Carvana's ability to use these NOLs would be substantially limited if its 5%-shareholders increased their ownership. The rights plan took effect on Monday, January 16, and will remain in place until January 15, 2026.

This so-called “Poison Pill” approach is probably Carvana's only option to avoid outright bankruptcy and/or a hostile takeover. How did the retailer get itself into this situation in the first place? Simple: it drastically overpaid for its used vehicle inventory during the pandemic as it tried to expand. Because new vehicles were in (and sometimes still are) short supply, consumers quickly gravitated towards used vehicles whose prices reached all-time highs.

industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook

Carvana's big gamble failed, more or less. But it wasn't just its overreaching and expensive expansion plan that got it into trouble. Since late last summer, we've reported on numerous instances in several states including Florida, Michigan, and Pennsylvania where Carvana retailers violated state laws regarding delayed titles, destroyed documents, and failure to maintain odometer readings.

One customer who purchased a mechanically troubled 2015 Volkswagen Tiguan was paid only $300 (after having to pay storage fees amounting to $1,700) as compensation following the vehicle's failure to start after just seven days of ownership. It was an extremely unfortunate situation for the customer and, quite clearly, very bad publicity for Carvana.

industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook
industry news, carvana agrees to sell $4 billion in loans in order to survive
Carvana/Facebook

Source Credits: Reuters

Keyword: Carvana Agrees To Sell $4 Billion In Loans In Order To Survive

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