Online used car buying seemed like a good idea when the Covid-19 pandemic hit in 2020.
Consumers could shop online at one of the major used car e-commerce retailers, such as Shift Technologies, Carvana, or Vroom, and not have to leave their homes.
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This was a major convenience for car buyers who wanted to avoid the risk of face-to-face contact with car sales agents during the pandemic.
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Simultaneous with the increase in used car e-commerce deals, prices for pre-owned autos began to significantly rise, which was a huge benefit for online dealers.
Rising prices were not a major burden for many consumers who received government stimulus checks during the pandemic that they could use for down payments on cars and relieve the sting of higher prices.
Once Covid vaccines and other measures reduced the risk of contracting the disease and people felt safe to mingle in public again, consumers returned to the automobile showrooms to physically inspect vehicles and test drive them again.
New and used car prices remained high and inventories decreased, but consumers kept returning to dealerships instead of patronizing the online used car dealers.
The decline in online used car buying led to financial distress for the e-commerce players such as Shift Technologies, which in October 2023 filed for Chapter 11 bankruptcy, liquidated its assets and closed its business.
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Carvana had success in 2020 and 2021 as a result of the Covid-19 pandemic, but declining sales and huge debt put the company at risk of a bankruptcy filing, though the company has avoided a filing.
Vroom files bankruptcy to hand assets to its lender
Finally, former online used car retailer and current lender Vroom Inc. (VRM) filed for Chapter 11 bankruptcy on Nov. 13 with a prepackaged reorganization plan that would wipe out over $290 million in unsecured senior note debt and hand almost 93% of the reorganized company's equity to its senior noteholders.
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The company's existing equity holders would retain about 7% of the reorganized company's equity. On emergence from Chapter 11 bankruptcy, the new company would have no funded debt obligations.
Vroom listed $43.8 million in assets and $304.6 million in liabilities in its petition.
The debtor's largest unsecured creditors include its senior noteholder, US Bank NA Corporate Trust, which is owed about $209.5 million; Anthem Blue Cross, which is owed $2 million; and Texas State Attorney General, which is owed $1.5 million.
Vroom, which was established in 2012 as an online used car retailer, became a success story during the Covid-19 pandemic in 2020 as consumers shifted to purchasing automobiles online and used car prices accelerated.
The company became a public company in June 2020, but unexpected economic conditions and industry challenges emerged, as investors began questioning the long-term viability of Vroom's e-commerce model, according to a declaration by CEO Thomas Shortt.
Vroom had difficulty raising capital to support its operations as a result of diminished investor confidence and significant funded debt. The company's share price had been depressed, putting it at risk of delisting.
The company's liquidity issues also put it at risk of defaulting on its unsecured notes, though over the years it had repurchased a significant amount of its outstanding notes at less than face value and reduced its debt from $625 million to $290.5 million.
Vroom determined that it couldn't raise adequate capital to fund its e-commerce business and suspended its Vroom Automotive online retail arm in January 2024 and decided to wind down its e-commerce business.
It continues to operate its automobile finance company United Auto Credit Corp. and CarStory, its artificial intelligence-powered analytics and digital services platform for auto retailers.
The company's ongoing financial distress led to negotiations with its unsecured noteholders, including Mudrick Capital Management, who hold 98% of the outstanding principal of the debtor's unsecured notes. The parties agreed to a restructuring support agreement to convert the $290.5 million in unsecured notes to almost 93% of equity in a reorganized Vroom.
The plan needs bankruptcy court confirmation of the plan before it can exit bankruptcy.
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