Yellow bankruptcy: Treasury's $700 million pandemic loan is 'undercollateralized,' congressman warns

By James Rogers

Rep. French Hill of Arkansas has repeatedly voiced his concerns about the $700 million federal loan made to Yellow Corp.

In the wake of Yellow Corp.'s bankruptcy announcement, Rep. French Hill of Arkansas has again voiced his concerns about a $700 million federal loan that the trucking company received in 2020.

On Sunday, the beleaguered Nashville, Tenn.,-based company announced its bankruptcy filing, which it blamed on the International Brotherhood of Teamsters union.

The $700 million bailout was made under the CARES Act during the COVID-19 pandemic. The Treasury Department's summary of the loan transaction described YRC Worldwide, as Yellow (YELL) was then known, as "a leading provider of Department of Defense supply transportation and other delivery services for the U.S. Government."

Hill, a Republican who is currently the sole member of the Congressional Oversight Commission, has been a vocal critic of the loan. "Anytime you have government directly involved in trying to make credit decisions for businesses, you're going to have catastrophic problems," he told MarketWatch on Tuesday.

Related: Yellow blames bankruptcy filing on 'bullying' by Teamsters

The congressman has argued that Yellow should never have received the $700 million bailout. "Yellow, certainly for many years following the financial crisis in 2008-09, would be deemed an overleveraged, struggling company," he said.

Hill is also the author of a Congressional Oversight Commission report on the Yellow bailout that was released in June. "Overall, the Commission continues to believe that the Treasury and the Defense Department made missteps in deeming Yellow as critical to maintaining national security and in executing the loan to Yellow," the report said.

So could the government take a financial hit in the wake of Yellow Corp.'s bankruptcy? "I think the Treasury is undercollateralized. I'll leave it at that," Hill said.

The loan was broken up into two tranches, with the $300 million tranche A dedicated to YRC's "near-term contractual obligations and non-vehicle capital expenditures." Tranche B provided "$400 million for capital investments made pursuant to capital plans subject to approval by Treasury," the summary said, noting that both tranches mature on Sept. 30, 2024.

As taxpayer compensation, the Treasury Department also received shares, equal to 29.6% of YRC's common stock on a fully diluted basis, to be held in a voting trust. With its stake of 15.94 million shares, the U.S. Treasury is Yellow's second-largest shareholder, according to FactSet data.

Related:As Yellow files for chapter 11, $700 million pandemic bailout is in the spotlight

"Unfortunately for the Treasury, I am afraid that their A tranche is in the third lien position behind the senior creditors," Hill said. "They do have the additional support of their warrant for the company's common stock, but I don't know if that will end up having any value."

Yellow has said that the loan, which was made in July 2020, will be paid back in full. "Our employees are professionals who, despite heavy hearts, worked diligently to clear the docks, deliver remaining freight, and close our terminal doors one last time," Yellow CEO Darren Hawkins said in the company's statement Sunday. "It is with this same professionalism that we intend to wind down our business, maximize recoveries for creditors and pay back the CARES Act loan in full."

The company also directed MarketWatch to letters sent by Yellow to the House Select Subcommittee on the Coronavirus Crisis. "The information the company provided in applying for the loan was completely accurate, and the use of the loan funds were and are completely appropriate, transparent, and in full compliance with the loan agreements," Hawkins wrote in one letter, dated June 2021.

"The Committee continues to call into question, without substantiation, Yellow's eligibility for and use of its CARES Act loan funds," the company added in a letter dated April 2022. "In truth and fact, and as this Committee now indisputably knows, Yellow's eligibility for and use of its CARES Act funds is, was, and continues to be appropriate in every respect."

Related:Tupperware and Yellow have skyrocketed, but don't confuse them with meme stocks

Hill told MarketWatch that he hopes the recommendations in the report, which was the commission's final one, will help Congress down the line. The report urged Congress not to create an open-ended sector-specific loan program in the future. "While the national security loan program may have been a well-intentioned response to extraordinary events, it ultimately proved to be unnecessary and morphed into something that Congress never intended -- a risky taxpayer bailout for businesses, like Yellow, that struggled financially before the COVID-19 pandemic and were not critical to maintaining national security," it said.

The commission ended its work for the CARES Act June 30.

The congressman also told MarketWatch that, in the future, he wants to see "mutual due diligence" on the part of both the Treasury Department and the Department of Defense.

MarketWatch has reached out to the Treasury and Defense departments with a request for comment.

Shares of the less-than-truckload company rose 20% Thursday. The stock is trading almost 30% below where it closed at $2.87 on July 7, 2020, when it entered into the loan agreement with the Treasury Department.

Tomi Kilgore contributed.

-James Rogers

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-10-23 1711ET

Copyright (c) 2023 Dow Jones & Company, Inc.