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The trucking company Yellow stands on the verge of bankruptcy, despite backing from one of America’s biggest private equity firms and the U.S. government.
The trucking company Yellow’s finances have been a train wreck for two decades. Its demise stands in as a history of American capitalism in the 21st century. Now the company is on the verge of bankruptcy, despite backing from one of America’s biggest private equity firms (or perhaps because of it) and the U.S. government, which will likely see next to nothing from the equity stake it acquired in a suspicious pandemic-era loan during the Trump presidency.
On Monday, Yellow informed the Teamsters union, which represents 22,000 of the company’s 30,000 employees, that it would cease operations. A large number of the non-union workforce was laid off last Friday. It was the likely end of a 99-year-old business that specialized in less-than-truckload (LTL) hauling at discount rates, a method for companies to only pay for the space they need. A single LTL haul could have goods from several clients, what the shipping platform Flock Freight calls a “jigsaw puzzle where several shippers’ pallets fit together to form one complete truckload.”
The supply chain trade publication FreightWaves reported on Monday how a bid for global dominance, through a series of acquisitions in the 2000s, saddled Yellow with an unsustainable debt load. This nearly bankrupted Yellow after the financial crisis in 2009, as revenues collapsed.
Yellow tried to save its business on the backs of its workers, giving the Teamsters a 15 percent pay cut by the end of 2009 in exchange for a 15 percent stake in the company. That pay cut would be extended in late 2010 to last through March 2015. Around the same time, the company wanted to stop paying into the Teamsters’ pension fund. By 2011, after Yellow’s restructuring efforts, public documents show that Yellow dropped its contributions by 75 percent.
Amid Yellow’s brittle finances, in 2014 the company engaged in a series of financial arrangements that relieved the company of $300 million in debt and refinanced another $1.1 billion, some of which is now part of a revolving line of bank credit collateralized by the company’s accounts receivable. By 2019, a new contract between Yellow and the Teamsters clawed back the wage concessions of the last decade and recovered a week of vacation plus increased health and welfare benefits. In the same year, Yellow also accepted a $600 million term loan, where the lead lender was the private equity giant Apollo Global Management.
This financial agreement would prove critical. In the immediate term, it placed Apollo at the top of the totem pole, with the most senior debt stake, above the revolving line of credit. The loan had unfavorable terms for Yellow, including a high interest rate of LIBOR plus 750 basis points, which was actually down from the LIBOR + 850bp Apollo had previously negotiated.
It also had an impact on the unionized workforce. Yellow, strained from the debt load, again refused to pay into its pension fund, triggering outrage from trucker employees.
The Teamsters considered the refusal to pay into the pension as the basis for a walkout, whereupon Yellow sued the Teamsters for breach of contract. A federal court in Kansas rejected Yellow’s effort to block the Teamsters from striking on July 21. The Central States Fund, a multi-employer plan that manages the pension, agreed to restore benefits for workers, averting a strike. But Yellow shut down a week later.
YELLOW SOUGHT OTHER ALTERNATIVES FOR A RESCUE. Months after the pandemic spread, then-Treasury Secretary Steve Mnuchin announced that the federal government would be extending a $700 million loan to Yellow in exchange for a 30 percent stake in the company. The loan was granted through an obscure pandemic loan program for firms classified as critical to national security; it was said to originally be earmarked for Boeing, which declined the terms as too restrictive. Yellow ended up securing 95 percent of the total loans through the program. The company tripled its lobbying expenses in the weeks leading up to receiving the government bailout.
The Trump administration, which lobbied for and approved the loan, had ties to Apollo. One of its founders, Josh Harris, was an advisor to the White House on infrastructure policy. Apollo also lent Jared Kushner’s real estate company $184 million to refinance a Chicago office tower it owned. Harris and Kushner met multiple times.
The pretext for Yellow acquiring the loan was that the company allegedly represented almost 70 percent of the Defense Department’s small-freight shipping and services to the Department of Homeland Security and U.S. Customs and Border Protection. Those numbers proved to be loaded, according to a congressional oversight report from Rep. French Hill (R-AR) published at the end of June. It found that Yellow accounted for only 20 to 40 percent of the Defense Department’s small-freight shipping. For this reason, career Defense Department staff recommended that the loan be denied, but a June 2020 call between Treasury Secretary Steve Mnuchin and Defense Secretary Mark Esper led to Esper certifying the company as “critical to national security.”
While the government’s equity stake, which led Boeing to decline the option, was seen as a way to capture profits if Yellow thrived, the government loan was actually junior to Apollo’s term loan, something Hill told The Wall Street Journal and the Prospect separately confirmed. It was also junior to the revolving line of credit.
So if the business collapsed, Apollo and other creditors would be able to take the proceeds from liquidation before the government. As Adam Levitin, a law professor at Georgetown University, told the Prospect, “the 30 percent equity stake gave Treasury upside if things went well. It just wasn’t well protected for the downside.”
To date, Yellow has made $68 million in interest payments to Treasury on the loan, but has only made one payment of principal for the whopping amount of $230.
The Treasury loan, at LIBOR plus 350 basis points, was cheaper than Apollo’s. But instead of Yellow using it to get out of the arrangement with Apollo, it spent more than half of it, the second tranche of $400 million, on a new vehicle fleet, a curious proposition for a company mired in debt. (It also rebranded from YRC to Yellow in the middle of all this.) As Levitin wrote at his blog Credit Slips, “That’s not payroll protection or national security. That’s just subsidization of a favored company … 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.”
For the imminent bankruptcy, Bloomberg reported that according to those close to negotiations, Apollo was spearheading a debtor-in-possession (DIP) financing deal. That deal will likely roll in Apollo’s previous term loan. While the terms, including the interest rate, have yet to be disclosed, under DIP, Apollo is effectively positioned as the senior lienholder, meaning they must again be paid first, before the Treasury Department. Apollo will have the ability to manage the process of liquidation on their terms, and whatever extra funding that goes toward completing the process—paying staff to sell off assets, for example—will also be ahead of the government’s.
Levitin said, “Treasury never should have been making the loan in the first place … Apollo was there first. Treasury loaned behind Apollo and the bank line of credit.”
Yellow was sitting on around $1.5 billion in debt and interest expenses already standing at $162 million for 2022—over 10 percent of principal—as of March 31, according to the company’s latest 10-K form. Which means that Apollo could be paid back with interest on top of interest as Yellow liquidates. As it stands, 14 percent of Yellow’s long-term debts were in fixed-rate structures, with interest rates ranging from 17 to 19 percent.
The 10-K shows something else: that the problems with Yellow had nothing to do with the Teamsters. As a percentage of revenue, labor costs were actually going down, even as fuel costs and operating expenses rose. The union had taken concession after concession, but mismanagement ultimately put them out of a job.
With Apollo steering the bankruptcy process through DIP financing, that opens the opportunity for a successor company to take its place, but without the burden of the Teamsters contract. Apollo has deployed this strategy previously with Warrior Met, the coal mining company formed out of a bankruptcy process in 2016. Workers claim the bankruptcy benefited Apollo and other private equity lenders, while allowing the new company to reject previously held labor contracts with the United Mine Workers and terminate the company pension. Warrior Met workers were on strike for two years before returning to the job without a deal.
The Yellow story, with its serial acquisitions, private equity financial extraction, shortchanging of labor, a government bailout, and runaway executive compensation (its top two executives made more than $6 million the year after the pandemic loan), could not be more perfectly suited for this era of capitalism. That includes the resolution of who will be the ultimate winners and losers.
