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

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 itcontinues to strugglewith 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.

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.