Treasury in the Red... with Yellow

Freight company Yellow is on the verge of bankruptcy. It's not a company whose financial distress would normally stand out but for the fact that it received $700M in national security loans from the US Treasury in 2020, and, oh man, are taxpayers going to take it on the chin. 

The Treasury financing was one of a eleven of national security loans made as part of the CARES Act, and it accounted for 95% of the total dollar amount of those loans.  These weren't PPP loans, but were supposed to play a sort of analogous role, ensuring that companies critical to national security would be able to keep operating. There are really two loans from Treasury to Yellow:  a Tranche A loans and a Trache B loan. 

The Tranche A loan is for $300M and is secured by a junior lien on Yellow's accounts receivable, cash, and various other squishy stuff. Tranche B is for $400M and is secured by the vehicle fleet it financed—something like 1,100 tractors, 1,600 trailers, and 140 containers.  Both loans are cross-collateralized with each other, meaning that the collateral for Tranche A supports Tranche B and vice-versa. The Tranche A and Tranche B loans sit behind approximately $1B of pre-existing debt in the form of (1) a revolver that's secured by the accounts receivable and cash and (2) a term loan (Apollo) secured by Yellow's terminals and rolling stock (other than those financed by Tranche B). Treasury also took an approximately 30% equity stake in Yellow.

There's no way to sugar coat this:  Treasury's screwed on the Yellow loans.

I struggle to see a lot of going concern value in Yellow. It's assets are a lot of rolling stock and software and personnel to manage the shipments and a network of terminals.  The terminal network suggests an analogy to railroads or pipelines—classic going concern cases—but unless there's some particular value to the constellation of terminal locations—something that's beyond my understanding here—then I don't think there's going-concern value. The rolling stock certainly doesn't have any particular internal synergies. And with Yellow having basically stopped operations, it's hard to see it restarting—companies that stop operating don't generally resuscitate. Any which way, it's pretty clear that Treasury's equity stake is worthless.

I'd also be shocked if there were any meaningful recovery on the Tranche A loan. The value of the A/R will dwindle with the decline of Yellow's business, and I'm not sure that the terminals will have particular value, much less enough to pay off Apollo and then trickle down to Treasury. 

The Tranche B loan should do better--there will be some value to the tractor/trailer collateral it financed. But as far as I can tell, the financing was all at 100% LTV—Treasury made a block loan to Yellow to finance equipment purchases, rather than financing individual tractors and trailers at some LTV limit. Given that the tractors and trailers necessarily depreciate as soon as they come off the lot (plus all of the subsequent wear and tear), there's going to be some losses on the Tranche B loan. 

(As an aside, it's ridiculous that Treasury made Yellow a loan to finance the purchase of equipment. That's not payroll protection or national security. That's just subsidization of a favored company. Yellow needed to replace some aging rolling stock, but that's different from expanding its fleet. There was no national security reason for expanding a private trucking fleet used mainly for non-military purposes that already had adequate capacity to service the military. Treasury shouldn't have been financing vehicle purchases at L+350 in any scenario, and certainly not with a last out maturity and at 100% LTV. For $400M, Treasury could have financed the purchase of a sizable freight fleet solely for military use, rather than subsidized a privately owned company that provides some of its services to the military.)

It's being reported that Yellow will obtain DIP financing from Apollo, which is no surprise—DIP financing usually comes from an existing senior secured lender. We haven't seen the financing terms, but they will surely be a rollup of Apollo's existing term loan (meaning a refinancing of that loan) plus a smidgen of additional cash to fund a liquidation, and it will come with a high rate, a tight budget, and demanding timelines that will force a fast liquidation. So maybe Apollo kicks in another $50M or so of new cash.  The DIP financing will likely be secured by a first lien on the terminals and other existing Apollo first lien collateral, and by a junior lien on everything else. It will leave Treasury slightly worse off—there'll be some new money that's ahead of Treasury, the loss of the chance to challenge the perfection of Apollo's liens, and all the various DIP lending fees and interest. Plus there will be the loss of governance control, as the DIP loan will basically hand the car truck keys over to Apollo and put it in the driver's seat for the bankruptcy.

DIP lending terms are virtually never those that would obtain in a competitive market, and that's a problem, but that's not what's going to cause Treasury to take a bath in this case. Treasury's losses on Tranche A will be the natural consequence of making a junior lien loan and on Tranche B will be the natural consequence of making an 100% LTV loan. The Tranche A losses were always going to be a risk in trying to prop up a company with operating capital during the pandemic, but the Tranche B losses shouldn't have happened because that Tranche B loan should never have been made.