Description

This is an interesting one – a potential solvent debtor case.

Yellow Corp. ("YELLQ", or the “Company”) was the 2nd largest LTL transportation carrier in North America. In August 2023, following a walkout by the Teamster union who (represented the majority of YELLQ’s labor force), the Company filed for Chapter 11 bankruptcy. With no workers or customers given the union walkout, there is no go forward business and thus YELLQ is pursuing a value-maximizing Chapter 11 liquidation.

Solvent debtor bankruptcies represent the holy grail of distressed investing, often resulting in significant returns albeit with somewhat binary risk. I believe YELLQ has a reasonable probability of being a solvent debtor case and recent progress in the case has de-risked the story. Notably, the debtor’s financial advisor, Ducera, recently noted in a court filing that they expect there to be a recovery to the equity. My equity values are as below and I believe the skew of returns warrants a small to mid-sized position:

• Base case: $16.49 (~154% upside)
• Bull case: $29.72 (~438% upside)
• Low case: $3.26 (~30% downside)

I believe the debtor’s estate will yield a recovery to the equity for the following reasons:

1. Distributable value will continue to surprise the market to the upside, resulting in $3.1-3.7bn of distributable value.  The initial tranche of the Company’s real estate portfolio (124 owned and 2 leased trucking terminals) sold for $1.9bn, a significant premium to Estes Express stalking horse bid for the full owned real estate portfolio. Significant value exists in the Company’s remaining 46 owned trucking terminals, leasehold interests, and rolling stock.
2. Unsecured claims (including multi-employer pensions) will be less than expected: The non-pension unsecured claims pool is limited & the company’s union pension claims will substantially reduced.

This case is unique as the Company’s DIP lender, MFN, is also the Company’s largest shareholder, owning 42% of the stock (all purchases post-bankruptcy filing). DIP lenders typically have significant influence over the progression of the case, which here is a huge positive for the equity given their alignment. Process design is often very important as it related to liquidations, and I believe this is a situation where the process is in the equity’s favor.

The Company filed for bankruptcy with $1.3bn of funded debt obligations (inclusive of accrued prepetition interest), which when combined with the Company’s DIP loans (an estimated $196.5mm) and $100mm of estimated future super-senior administrative expenses results in $1.7bn of secured & senior claims liabilities.

In bankruptcy, secured claims (i.e., funded debt) are paid first, followed by unsecured claims (i.e., pension claims, trade claims). Only if there is residual value following the full payment of both secured and unsecured claims will equity holders receive a recovery. Therefore, in evaluating the ultimate potential recovery to YELL’s equity, you must evaluate (1) what is the total value of the estate; and (2) what will the unsecured claims be, and in this case, what will pension claims be.

Distributable value

We know the debtors estate is currently worth at least ~$2.2bn, comprised of $1.9bn for a 124 owned and 2 leased trucking terminals, $83mm of proceeds from the assignment of 23 leases, $15mm for the assignment of a single lease in New Jersey (per docket number #1397), $163mm of accounts receivable, and $39mm of cash on balance sheet (as of most-recent MOR).

I believe there is significant incremental value to the estate in the form of:

1. Proceeds from rolling stock (i.e., trucks and trailers). The company owns approximately 2,500 newer trucks purchased in the past few years, which based on channel checks and online auction sites are worth +/-$100k each, yielding $250mm of proceeds. There are an additional ~10,000 older owned trucks, which via auction or sale to foreign markets, may trade for an average of +/-$25,000 each, yielding a further $250mm of proceeds. Trailers (of which the company has over 30,000) are likely worth +/-$5,000 each, yielding a further $150mm of value to the estate. In short, the rolling stock is likely worth ~$600mm alone net of a 8.0% estimated sales commission (Yellow has an agreement with auctioneers that any parties with whom Ducera – debtor’s FA - has been in contact will carry a fee of 5.0% vs. the ~10% as indicated below).
   1. Since YELL’s collapse, other trucking companies have had to absorb the 13.0% of the market that YELL previously controlled, which has seen pricing improve. This helps improve the marketability of YELL’s rolling stock as the LTL is surprisingly tight. Notably, Estes, Fedex and ODFL recently increased prices MSD-HSD %, reflecting market conditions.
   2. As disclosed in the bankruptcy proceeding, the rolling stock was recently appraised at $1.0bn
   3. Of note is the commission structure for the rolling stock auctioneers (below) , which indicates the rolling stock should sell for at least $475mm

2. Additional owned real estate sales. The Company has 46 remaining owned properties which are currently at auction. The debtor’s financial advisor recently stated in a court filing that these properties received significant interest and were removed from the initial auction to have their own process (see Cody’s declaration for the initial real estate sale). While these valuations are ultimately hard to estimate given the real estate valuation is as much a trucking network analysis as it is a real estate valuation, the 124 owned assets sale occurred at an average estimated $272k per door. I assume a base case discounted valuation of $115-155k per door, although think there could be upside to this number. This generates an additional $365-490mm of value to the estate.
3. Leasehold estate: The debtors lease approximately 150 freight terminals. During the GFC, the Company sold its best properties in sale-leaseback transactions with initial rents struck during a period of weakness in the economy (i.e., at low initial rents). While there’s no disclosure on the nature of these leases, these are likely long-duration leases (10 years with renewal options). Industrial rents have grown 7%+ annually since then (and much higher in some markets) while YELL’s leases likely only have ~2.0% or CPI-based escalators. This means their leases are (on average across the portfolio) likely significantly below market. While people usually expect lease rejection claims, I believe there will be significant value to the estate from the assignment of leases ($200-500mm). On December 20^th, the Debtors announced that they had assigned 23 leases for $83mm, or $3.6mm per lease. Separately, in an objection filed to the docket (docket number #1397), it was disclosed at a single lease (not included in the 23 announced on December 20^th) in New Jersey had received a bid for $14.6mm. A high level look at the remaining leases indicates that there are some very valuable properties in here – while the devil is in the detail, assuming $15-61k per door ($38k base case, roughly equal to est. value per door for the leases sold on December 20^th) for the remaining leases yields $200-500mm of total lease assignment proceeds.

Based on the above, I estimate that the debtors distributable value is as follows:

• High case: $3.7bn
• Base case: $3.4bn
• Low case: $3.1bn

Unsecured claims

Ultimately, the recovery to YELL equity is contingent on the allowed unsecured claims pool, which I expect to be a large fight in the bankruptcy (and will be the most controversial part of this pitch – happy to discuss in the comments). As discussed above, there are $1.7bn of funded claims (i.e., secured and senior claims). Therefore, in the base case, for there to be any recovery to the equity, the unsecured claims pool must be below $1.7bn.
At a minimum, unsecured claims will equal ~$350mm, which is estimated to be comprised of (1) $200mm of AP/trade claims/GUCs; (2) $98mm of on balance sheet pension liability; and (3) $50mm of unpaid July pension obligations. The key questions becomes what pension claims will the bankruptcy court allow and will the estate be required to pay WARN Act claims:

• MEPP pension claims: The key question in this case relates to the Teamsters multi-employer pension plan liabilities. A multi-employer pension is a pension plan for union members in which different companies pool together and collectively contribute for their employees. The intent is to ensure that if one company goes BK, their union employees will still be provided for by the other companies. Significant mismanagement of these pension plans resulted in the plans being bankrupt. YELLQ’s largest pension plan, Central States, was just 18.0% funded in mid-2022. Then, at year end 2022, Biden bailed these pension plans out with the American Rescue Plan (the “ARP”). By year end 2022, the Central States pension plan was almost fully funded (it had recorded ARP proceeds on its balance sheet) and in April it was disclosed the plan was 98.5% funded (the recent move higher in interest rates likely means the plan is fully funded today). Despite this, the Central States pension has asserted a $4.6bn+ claim against the YELLQ estate. This is the bear’s big fear – that this claim is allowed at anything close to the sticker price. There are a number of reasons why I think this should be heavily discounted to <$600mm, and can even see it being zero. Potential outcomes / reasoning below:
  • Scenario – the claim is worth less than $600mm (most likely): Under pension regulations, employers can either pay the amount owed in a lump sum or the amount owed per year over 20 years. In the latter case, taking YELLQ’s 2022 contributions and NPVing them over 20 years at a 4.0% discount rate yields a liability of $891mm. However, any funds contributed would be invested, so the amount ends up being ~$600mm. I think of this as the absolute worst case scenario for the pension plan, as ultimately, the debtors 2022 payment was based on a funded status materially below its status today. In other words, the amount required to be contributed today is likely less than the $62mm paid into the plan last year. In conclusion, assuming the pension claim is allowed, any amounts owed will be paid out over 20 years and discounted back, resulting in a claim that allows for significant value to the equity.
  • Scenario – the claim receives $0: This will ultimately be a huge fight in the case with the union. Given the pension is likely fully funded, any proceeds from the estate to the pension fund would result in a windfall (and would violate the absolute priority rule). As outlined in the debtor’s objection, the union pension plan should not be able to double dip at the expense of other unsecured creditors or equity holders. TBD on whether the judge will allow this as using ARP funds is novel territory for the court. That said, there is a reasonable probability that the claim is regarded impermissible and thus worth $0.
  • Scenario – settlement: The debtors are suing the Teamsters for putting them out of business, the Teamsters are asserting exaggerated claims, you get the picture. I’m sure there’s some sort of settlement to be had that results in a <$600mm claim
• WARN Act liabilities: The WARN Act requires that in the event of a mass layoff, the employer provide affected employees 60 days notice. In a free-fall bankruptcy, such as YELL, it is not feasible to provide such notice. Case law in the Third Circuit (where YELL filed for bankruptcy) indicates that they will not be required to pay WARN Act liabilities. That said, the judge could decide differently, resulting in a $200mm additional liability. I include WARN Act liabilities in my unsecured claim, although think there is a reasonable chance this number is a lot lower.

I have additionally modelled a $50-150mm contingency across all scenarios to reflect the risk of additional, not yet known, unsecured claims. I note that my numbers as above are higher than the unsecured claims shown in the most recent monthly operating report.

In sum and inclusive of the pensions, I estimate between $448mm and $1.3bn in unsecured claims.

Waterfall

So, what does the waterfall look like? See below. As can be seen below, the range of outcomes are compelling. Importantly, the combination of a substantial increase in distributable value implied by success to-date from asset sales in addition to a pension number that is likely less than $600mm results in significant results to the equity.

How does the process unfold from here?

I expect the rest of the case to wrap up relatively quickly, as the debtors are seeking an efficient space in order to maximize the estate. That said, the pension litigation will take a long time, and the disposition of the Company’s rolling stock will likely occur over the next year. I wonder if the debtors are waiting to sell these assets until they have resolved the union pension claims (i.e., not waiting to show a big jump in distributable value?).

The Company is currently auctioning of its remaining real estate. The auction started on December 18^th and partial results were announced on the 20^th. There are likely to be additional headlines into the new year as the remaining auctions are completed.

For those of you relatively new to situations like this, it’s well worth reading the following docket items on the bankruptcy docket for case context (which can be found for free at https://dm.epiq11.com/case/yellowcorporation/info):

• Docket #: 14
• Docket #: 1303
• Docket #: 1322
• Docket #: 1397
• Docket #: 1403

Conclusion

In conclusion, I ascribe a 60% probability of either my base or bull cases occurring. In each case, the waterfall would be as follows:

• Bull: distributable value of $3.7bn less funded/secured/admin claims of $1.7bn less $448mm of unsecured claims = $1.5bn of equity value = $29.72/share
• Base: distributable value of $3.4bn less funded/secured/admin claims of $1.7bn less $873mm of unsecured claims = $858mm of equity value = $16.49/share
• Low: distributable value of $3.1bn less funded/secured/admin claims of $1.7bn less $1.3bn of unsecured claims = $170mm of equity value = $3.26/share

Ultimately, the equity return is highly contingent on the ultimate pension claim which is a big unknown, hence the 40.0% probability of the low case occurring. That said, I think the favorable up/down warrants a position.

Risks

• The range of outcomes is binary and largely contingent on the allowable pension union claims. The position should be sized with this risk front and center.
• Illiquidity – the stock is, like other bankrupt equities, illiquid. That said, with the recent rally it has become significantly more liquid ($2-3mm/day), sufficient to put a reasonable position on.
• The bankruptcy lasts longer than expected, increasing administrative expenses.

Catalyst

Catalysts include: (1) potential appointment of an equity committee; (2) completion of asset sales; and (3) resolution of pension liabilities.

Catalyst

Catalysts include: (1) potential appointment of an equity committee; (2) completion of asset sales; and (3) resolution of pension liabilities.