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Investors owning bankrupt Yellow Corporation (OTC:YELLQ) which is liquidating in Ch.11, had some great news and also some potentially terrible news over the last few months. The stock is up 150% since my November article. Asset sales were much stronger than expected, but various pension claims, if allowed, may prevent shareholders from getting any recovery. This is an update to my prior YELLQ article.
Very Strong Asset Sales Results
There were media reports last November that Jack Cooper Transport was interested in buying Yellow Corporation as a going concern for $2 billion. That deal never really got off the ground because asset sales were so terrific. Yellow was worth more liquidated than an operating trucking company.
Initially, there was a stalking horse bid for real estate assets by Estes Express Lines for $1.3 billion, but after Old Dominion Freight Line submitted a $1.5 billion bid, Estes raised their bid to $1.525 billion. During the actual auction process, each real estate parcel was auctioned individually. There was very aggressive bidding over a number of days that resulted in 128 owned and 3 leased properties being sold for $1,882,637,655 (docket 1354). The total was over $350 million more than the stalking horse bid and this was not even for all the owned properties. There are still 46 owned properties that remain to be sold. YELLQ shareholders were thrilled by these results and YELLQ stock soared.
Later during the asset sale process 23 leased properties were sold for $82,892,697 (docket 1737). The total of these two yielded $1,965,530,354 before fees or approximately $37.70 per YELLQ share. This total. of course, is before significant liabilities and allowed claims are deducted.
As of December 31, $788 million of the pre-petition and post-petition debt has been paid down using the cash proceeds from these sales. There will be continued paydowns of debt as the asset sales actually close. There were a number of additional asset sale closings in January (docket 2039). Most, if not all, of the secured pre-petition debt will be paid off during the liquidation process, which means those parties will not even be involved in the bankruptcy plan negotiations.
They are also liquidating their 11,700 tractors and 34,800 trailers. In my prior article I estimated they would receive approximately $487 million after incentive fees. Because the prices for used tractors and trailers continue to drop and are expected to continue their downward trend, I am applying a 10% cut to that estimate to be prudent. I now estimate the cash to be raised from the rolling stock liquidation will be approximately $438 million.
Payments on Accounts Receivable By Customers
Most YELLQ investors have been focusing on these important asset sales, but there is also a very critical cash-raising issue that must be looked at. Payments of accounts receivable too often are ignored. Yellow had a total of $535 million in accounts receivables, net of allowance for doubtful accounts, as of June 30, or about $10.26 per YELLQ share. The actual amount of accounts receivable is not available at the time they filed for Ch.11, but payments (or non-payments) by customers on these accounts receivable could have a significant impact on shareholder’s recovery.
These accounts receivables are held by a number of different Yellow entities. For example, YRC, Inc. had about $157 million in accounts receivable as of August 31, but that amount has dropped to $66 million as of December 31. USF Reddaway’s accounts receivable dropped to $9 million from $20 million, USF Holland’s dropped to $14 million from $46 million, and Yellow Logistics’ dropped to $1 million from $13 million. This is a very positive development. Too often customers just don’t pay during a liquidating Ch.11 process. There could, however, also be some increases in the allowance for doubtful accounts because only the net accounts receivables are reported on monthly operating reports.
These amounts are from monthly operating reports – MORs, which often confuse investors. MORs do not use GAAP accounting. YELLQ files a MOR for each individual bankrupt entity. In this bankruptcy case, there is no consolidated report that shows the intercompany adjustments. Cash reported is very reliable, but some other items, such as shareholder equity, are very misleading. If you add up shareholder equity for all the entities contained in an exhibit (docket 1906) for the latest MORs, the total is a shareholder equity of $4.16 billion. That is very misleading. They reported a shareholder deficit of $448 million on their 2Q 2023 10-Q. These reports are required by the U.S. Trustee for their use and are not really for the investing public.
New Alternative Dispute Resolution Procedure
Another recent development is rather technical but could save millions of dollars in legal fees. These savings could directly have a positive impact on any shareholder recovery. There was an agreement to establish an “alternative dispute resolution procedure” (docket 1817) that allows those seeking payment/resolution to disputes, such as prior vehicle accidents involving Yellow Corporation trucks, to use this out-of-court procedure instead of getting highly paid bankruptcy lawyers involved in negotiating settlements.
I cringed when I heard during a bankruptcy hearing that Kirkland & Ellis partners have been communicating with lawyers representing crash victims seeking payment. Some of these partners are billing at more than $1,800/hour. If K&E lawyers handled all these disputes the legal fees for this bankruptcy case would be extremely high. Most of these disputes will be paid by their insurance company, Old Republic Insurance, and not directly by Yellow. This procedure could also improve the time it takes for this bankruptcy case to be concluded and money paid, if any, to shareholders.
Balance Sheet Lease Liabilities Are Actually Assets
Before looking at the negative recent events I want to highlight a balance sheet liability and that is “lease liabilities”. As I covered in my prior article some of these leases/contracts could be rejected under section 365. Since many of their leases are being sold at a nice profit, those leases are not really liabilities – they are assets. (Some of the leases are also for equipment/vehicles.) Anyone using a “back of an envelope” approach to determining potential recoveries may want to ignore these lease liabilities shown on prior balance sheets as an item that has to be paid before shareholders get paid because it may end up being only a token total amount.
Pension Claims Depend On The Judge
The reality for YELLQ shareholders is their recovery depends on decisions by bankruptcy Judge Craig T. Goldblatt and could eventually depend on decisions by the Third Circuit Court of Appeals. Unless I am very familiar with the bankruptcy judge I would not consider investing based on this unpredictable factor. Judge Goldblatt is relatively new (2021) and I am not familiar with his judicial approach/reasoning.
There are basically two major issues pending. The first is the WARN Act issue for failure to give 60-day notice to employees prior to their termination. I covered this potential $450 million claim in my prior article. Nothing has happened since the adversarial case Rivera et al v. Yellow Corporation et al (23-50456) was filed last August. The second issue is potential pension fund liabilities.
Statutory Withdrawal Liability Claim And Arbitration
I will try to take the middle route when covering the very technical legal issues associated with Central States Pension Fund’s claims. I will also try to briefly summarize the critical issues contained in numerous very long docket filings. Basically, Central States has filed claims for three different types of claims. The largest is for $4,827,470,743.87 for a “statutory withdrawal liability” when Yellow withdrew from the Central States’ pension fund last summer (claims #4312-4335). The second is for $917,028,151.83 for “claims pursuant to the 2014 Letter Agreement, under which Debtors guaranteed the payment of certain pension contributions to Central States Pension Fund” (claims #4336-4352). The third is for a $865,555.47 total of unsecured claims and $126,167,000.33 total of priority claims for “unpaid pension and health and welfare contributions” (claims #4303-4306). (A list of all filed claims is available on dockets 2042 by numerical order and 2041 by alphabetical order.)
Yellow filed an objection to Central States’ claims on December 8 (docket 1322). Central States then filed a motion on January 8 to compel arbitration regarding their statutory withdrawal claim (docket 1655). Central States filed a response to the objection to the claim on January 19 (docket 1833). On January 26 Yellow filed their opposition to the arbitration motion (docket 1965). Some of these issues were set for a January 22 hearing but were continued to a February 14 hearing.
Because Yellow objected to their claims, the burden of proof now is on Central States. Yellow does not have to prove to the court that Central States claims should not be approved. Central States has to prove that their claims should be approved. While this may seem technical it is an important issue when the judge actually considers all the evidence/testimony when making his decision.
Usually when filing an objection or a response to an objection the filer’s strongest argument is included right in the beginning. So, I was rather surprised to read Central States’ response. While the first paragraph of the introduction did include a brief reference to a law, most of their argument centered around the hedge fund MFN “cashing in on the lottery tickets (i.e., stock) MFN purchased” and receiving “massive payouts” if their claims are not allowed by the court. Are they asserting that a major reason for the court to approve their claims is so that a hedge fund does not make money on their investment? This is an “interesting” approach. It seems more of a PR approach rather than actual laws/case law approach, in my opinion. Eddie Lampert took this PR approach when trying to convince Judge Drain to allow him to buy the remaining Sears/Kmart stores via a credit bid to “save 40,000 jobs” during Sears Holdings bankruptcy process. It worked. Lampert got the stores. Central States’ response does eventually go into detailed legal arguments for their claims.
Central States wants the bankruptcy court to abstain from resolving the withdrawal liability and have that claim instead settled by arbitration. Since Yellow disputed the amount of withdrawal liability so now Central States asserts:
that the dispute must be pursued in arbitration. Specifically, 29 U.S.C. § 1401(a)(1) mandates that “[a]ny dispute between an employer and the plan sponsor of a multiemployer plan concerning a determination made under sections 1381 through 1399 of this title shall be resolved through arbitration.”
Yellow in their response (docket 1965) to arbitration motion asserts that section 502 of the Bankruptcy Code states, “if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim”. Yellow additionally asserts because Central States filed a claim with the bankruptcy court, the court and not arbitration should resolve this claim issue.
Central States asserts because Yellow withdrew from the pension fund they have a liability “pursuant to 29 U.S.C. §§ 1301(b)(1) and 1381, and the regulations thereunder”. Yellow counters that Central States was fully funded by receiving $35.8 billion under the 2021 American Rescue Plan Act. Yellow asserts that if Central States is paid $4.8 billion they are getting a “double recovery”/”windfall”.
I did not see any statement by Central States that they will use the money received from their claims to pay the U.S. government back part of the $35.8 billion if the court approves their claims. (Since their claims are unsecured claims only a small percentage of the $4.8 billion would actually be received under a plan.) Yellow is asserting that according to 29 C.F.R. § 4262.15: “A plan receiving special financial assistance pursuant to this section shall not be subject to repayment obligations with respect to such special financial assistance.” It seems that they are not legally required to pay any money back so Yellow feels they would be getting “double recovery”.
2014 Agreement Letter Claim
The second claim for over $900 million is based on the 2014 Agreement Letter. (The 2014 Agreement Letter is Exhibit A in docket 1833 starting on page 49 of 720 pages.) Central States asserts that they breached this agreement when they stopped paying into the fund last July and now owe “113 months of the guarantee period” payments as damages. Yellow counters that Central States is benefitting by their withdrawal “by reducing future benefit accruals”.
Collective Bargaining Claim
The final claims are contribution claims based on collective bargaining agreements. Yellow’s objection was rather unclear:
The Debtors will seek discovery from CSPF to understand the alleged basis for these Proofs of Claim. If CSPF can justify them, the Debtors will negotiate in good faith with CSPF on an appropriate claim and propose it for allowance.
Yellow is also asserting that the amounts of some of these claims are determined incorrectly. They are in the middle of a discovery process. For example, Yellow wants to know if they used present values or if they just summed up the numbers to get a total. A hearing is set for February 14, but I would not be surprised if it gets continued to some future date.
$8.4 Billion In Pension Claims Could Mean No Recovery
This article only covers Central States’ claim. According to Yellow “at least 19 other multiemployer pension plans have also filed claims against the Debtors, seeking an additional $2.5 billion in withdrawal liability”. So there are approximately $8.4 billion in pension-related claims that if allowed would mean that YELLQ shareholders would get no recovery. Almost all of these claims are unsecured claims and would, in theory, share the same recovery as other unsecured claims. The potential for up to $450 million WARN Act claim also has to be factored in.
Conclusion
There are a number of factors that impact the amount, if any, YELLQ shareholders could receive: 1) amount received from selling remaining owned and leased properties; 2) the amount received from selling rolling stock; 3) the amount received from rolling up operations, such as accounts receivable 4) expenses paid for the various entities for limited operation expenses such as security; 5) professional fees, including legal and Ducera Partners incentive fees; 6) court’s decision on WARN Act potential payments; 7) court’s decision on claims asserted by Central States and other pension fund entities; and finally 8) time – you need to determine the present value of any potential future payment.
Because so many of the above factors are almost impossible to estimate with any degree of accuracy, Yellow Corporation stock remains a neutral/hold recommendation.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
