💥What's $32mm Among Friends? Yellow Corporation, Part II.💥
💥What's $32mm Among Friends? Yellow Corporation, Part II.💥
Yellow's Bankruptcy Gets Competitive, Dan Loeb Speaks, Western Global Files, Mercy Hospital Too + More.
Apparently…
On Wednesday, we posited the above ⬆️ question in our initial dive into Yellow Corporation’s chapter 11 bankruptcy cases. You’ll recall that Yellow Corporation ($YELL, f/k/a YRC Worldwide Inc.) and 23 affiliates (collectively, the “debtors”) filed their cases on August 6, 2023 in the District of Delaware and the cases were assigned to Judge Craig T. Goldblatt. The cases are asset sale cases — but not going concern asset sale cases. In fact, the debtors started their liquidation process before the filing making the most immediate issue, aside from your standard “first day” relief, the rich-AF DIP financing ($32mm in fees!) proposed by the debtors and committed lender, Apollo Global Management ($APO). You can revisit our prior coverage of, among other things, the proposed rich-AF DIP financing (again, potentially $32mm in fees!!) here1…
…and we’ve drawn up a case roster of professionals here:
That roster is actually rather important because this case features a sordid cast of characters, many of whom made the appearances known at the first day hearing. You’ve got:
The debtors, represented by Kirkland & Ellis LLP as legal counsel and Ducera Partners as investment banker.
Apollo, the proposed DIP Lenders and pre-petition B-2 Term Lenders (to the tune of ~$501.5mm), represented by Milbank LLP.
Beal Bank USA, another pre-petition Term Lender (45%) represented by White & Case LLP.
The United States Treasury, as pre-petition Tranche A and Tranche B lender ($737mm, and second largest equityholder with 30%), represented by Arnold & Porter Kaye Scholer LLP.
MFN Partners Management LP (“MFN”), YELL’s largest equityholder (~45%!), represented by Quinn Emanuel Urquhart & Sullivan LLP.
A signal that things at the hearing would be interesting hit the docket in advance of the hearing in the form of an amended hearing agenda. The original agenda indicated that the DIP motion was “going forward with respect to an interim order” but that was changed to reflect, well, this:
As a preface to this state of affairs, debtors’ counsel Patrick Nash of Kirkland…
…provided an opening statement that emphasized, in a number of ways, that the debtors are very optimistic that all secured lenders — that is, significantly, Apollo and the US Government — ought to be covered from the proceeds of future asset sales. That is, in distressed parlance, the secured debt “…is not the fulcrum.” He said:
“We’ve got approximately 308 service facilities. 169 of those are owned. 142 of those are leased. Those are terminals, Judge. We’ve got approximately 42,000 trailers. Approximately 38,400 of those are owned. Approximately 7,200 of those are leased. And we’ve got approximately 12,700 tractors … approximately 11,700 of those are owned, and approximately 1,000 of those are leased.” (emphasis added)
And the value of those?
“ [E]arlier this year, the terminals and the rolling stock were appraised at an approximately $2.1b valuation — approximately $1.1b for the real estate, and approximately $900mm for the trailers.” (emphasis added)
Again, Mr. Nash came strong with:
“And from our perspective, we are very optimistic that the sale proceeds are going to exceed the entirety of the debtor’s secured capital structure, including any post-petition financing.”
The fine folks at Ducera Partners LLC have apparently been hard at work marketing those assets. Of 292 parties that Ducera contacted, there are 93 parties under NDA, including 21 strategics. 15 have declined to participate and approximately 184 are still evaluating whether to participate. That’s quite a bit of action.
Stealing some of Ducera’s thunder, Mr. Nash put his marketing cap on:
“I’ve read numerous articles where industry experts are describing this as a once-in-a-lifetime opportunity for interested parties to secure assets such as these and the volume of these assets. Yellow’s terminals are located all over the country. Many of them are in what are already built-up urban areas. So if you’re interested in a terminal in a specific built-up urban area … they’re not building any more of them. So we do have a lot of optimism around the sale process.”
How optimistic exactly? Consistent with the secureds-are-not-the-fulcrum theme, he added:2
“[W]e’re cautiously optimistic that there’s going to be material proceeds available for unsecured creditors.”
“[W]e do expect that there is going to be a lot of unsecured claims generated here and expect that there will probably be a lot of work to be done on that denominator.”
Obviously, we’re not treating those comments as gospel and we’ll see if the assets are worth their salt as the process drags along, but we will note that the appraisal Mr. Nash references was done months ago when the company still had business and we imagine valuations for a going concern asset are going to be different from an asset liquidation.
Indeed, Milbank’s Dennis Dunne, on behalf of Apollo, was … well … skeptical:
“And if we ever get to a contested hearing, you’ll see the appraisals that were done in very different circumstances and under very different assumptions with respect to … going concern assumptions.”
A little early for a valuation fight here guys. But we’ll get back to Mr. Dunne in a bit.
Back to the rich-AF proposed DIP…
Mr. Nash seemed nearly apologetic about it, lol (“…there are aspects of [the rich-AF proposed DIP] financing that we wish were different and that we didn’t love.”). He highlighted its rich-AF features, including (i) the day-one roll-up of all of B-2 term loan, (ii) the $142.5mm of new money predicated upon that roll-up, (iii) bid procedures entered within 10 days, (iv) bid procedures acceptable to the lenders (which would preclude a piecemeal sale of the debtors’ assets, apparently), and (v) a 90-day DIP maturity (subject to a 15-day extension with lender consent).
Enter MFN. MFN evidently saw the terms of the Apollo DIP, calculated the potential value lost to rich-AF DIP fees and be like:
So, MFN generously came up with its own proposal. It contains much the same terms as the original DIP from Apollo, but fees are a fixed 5.0% on the new money, the maturity is 180 days instead of 90 days, and there also isn’t a rollup since MFN wasn’t a pre-petition lender.
Which means that there are quite a few things to like here from the Debtor’s perspective. The lack of a rollup is obviously nice, but also, the extended maturity gives the company and Ducera more time to conduct their sale process. And if you recall, we mentioned in our previous piece that there was the possibility of fees running rampant in Apollo’s DIP proposal (up to 22% of new money), so it’s a good thing that here, there’s only a fixed 5.0% fee on the new money. The amount of new money ($142.5mm) is the same as the original Apollo DIP btw.
But this also means that there are quite a few things not to like here from Apollo’s perspective — most notably where MFN proposes its financing will sit with regards to pre-petition collateral. There aren’t any unpledged assets the company can assign to the financing and MFN doesn’t want to come in junior sooooooo … MFN basically said “no worries, just slot us in to prime the B-2s on non-ABL cash collateral and put us in for some pari-passu action with the B-2s on the rest of their collateral, all good!” to which Apollo be like:
Ooooooh. Not sure, guys, you want to make Apollo unhappy. Just sayin’.
Apollo. Was. Not. Happy.
And we kind of understand it. See, Apollo got absolutely punked right before the hearing. Not only that but now they’re expected to share their collateral with the people who just punked them? Hell no, those are Apollo’s trucks and trailers! Here is Mr. Dunne:
“[J]ust at the end of last year, the company was doing $5b in revenue … and they went from there to shutting down and liquidating. How we arrived here and the decisions made by the company over those quarters in reaction to the conduct of the union [SOB!] and otherwise will no doubt be hotly debated and contested … [but] once the company made this decision to liquidate pre-petition and wind down its operations, Apollo and the other lenders immediately sprung into action enough to work with them.”
Indeed, recognizing that there’d be more need for liquidity than the company could access through use of cash collateral alone, Apollo, per Mr. Dunne, “…worked tirelessly with the company to kind of size that dip financing amount that would offer the debtors the necessary liquidity, but that was predicated on a heavily negotiated, carefully calibrated budget to ensure that both the assets were sold thoughtfully and on a reasonable and appropriate timeline.” That should have been the end of it. But no! In walked MFN and now Apollo has to, like, compete for the DIP — an extra whammy considering they thought they were in on what was purportedly a healthy company mere weeks ago.
Awwwww poor Apollo.3
Mr. Dunne continued expressing his consternation:
“I’d say this is unusual, at least in my career. I’ve certainly been in cases where the debtors have paused to receive some kind of committed facility and commitment letters that were materially better or they took out the incumbent lenders … but it’s a decision that, while it’s a surprise to us, it basically just has us concerned and a bit fatigued and you only have to look at the recent history to understand why. Not too long ago, we were loaning to a company that had $5b in revenue …. But then the company, for whatever reason … failed to execute on the plan of integration of their various business lines, and the business … kind of fell off a cliff.”
He added:
“The debtors are now pivoting away from that in the hope that something better comes along. But it’s those decisions … or indecisions, that make us continue to be concerned about the trajectory of the cases and the value of our collateral. We hope that this doesn’t lead to additional delay and degradation. We’re really just looking to protect our collateral and receive payment on the claim.”
Well put and good composure Mr. Dunne, we’re sure there were some more colorful words left unsaid. Also, those rich-AF fees!!
Furthermore, it’s a little bit awkward/weird that after Mr. Nash’s reassurance about more than adequate collateral coverage on the secured debt, MFN still wasn’t willing to fund on a junior basis.
Mr. Dunne points this out:4
“One of the DIP lenders, the one that precipitated the adjournment, MFN, their DIP is coming in pari. That always concerns us because that means, notwithstanding Mr. Nash’s contention, that they believe we are extremely over secured, the DIP lenders unwilling to underwrite that proposition, they don’t want to be junior to us.” (emphasis added)
Mr. Dunne goes on to say the magical words: “adequate protection.”
“It’s possible, although I hope unlikely, that the debtors don’t move for approval of a consensual adequate protection stip with us, and we have to fight for it. In that case, we need to be clear on one item, and it is why I’m putting it on the record now. We requested adequate protection prepetition – we requested it already. And to the extent we have to formally seek it in the future … we seek adequate protection from the petition date forward. It’s from the petition date that we made our request and at all times have made our request for adequate protection from the petition date. I don’t think I can say it more clearly than that.”
Yes Mr. Dunne, loud and clear, adequate protection from the petition date forward.5
Eric Winston of Quinn Emanuel Urquhart & Sullivan, LLP, on behalf of MFN Partners shot back at Mr. Dunne’s skepticism of MFN’s new DIP proposal:
“[B]y eliminating the roll-up, that actually ends up saving the estates at least $32mm, maybe as high as $41mm in fees that would otherwise incurred on that roll-up amount.” (emphasis added)
Oh c’mon Mr. Winston, what’s $32mm among friends??? Also, what’s the going rate for a priming fight these days?
Mr. Winston also wanted to make it clear that when it came to which DIP option the debtors ought to take, MFN just wants whatever is best for the debtors’ estates. He notes:
“And from MFN’s perspective, whatever is best for the estates is the best one that should be picked. It does not have to be MFN.”
Good guy MFN Partners just looking out for all stakeholders (and their own equity interests).
And if at this point you’re thinking “wow two DIP financing proposals, what great competition,” get ready to have your socks blown off. The morning of the hearing, the debtors received a THIRD DIP proposal from Estes Express Lines, an LTL freight operator. And if you thought the MFN DIP was sweet, Estes is offering $230.0mm of new money (up from $142.5mm), a 15% interest rate (2% lower), a 4% fee on new money (1% lower), 180-day maturity, AND they’re offering to come in JUNIOR to the B-2 loan.
There’s no rollup, no exorbitant fees, a lower interest rate, more new money provided, and a longer maturity. AND, importantly, because Apollo isn’t getting primed, they’ll be much more receptive compared to the MFN proposal.
There’s no ink on paper yet and the Debtors are “feverishly” trying to draft up a term sheet for the Estes proposal. White & Case LLP’s Scott Greissman (again, representing Beal Bank USA, holders of the B-2 loan) snarked:
“It’s hard to understand how [the Estes DIP proposal] is going to get pulled together by Friday, but I won’t begrudge Kirkland the opportunity to try.”
You don’t really have to do too much convincing when “trying” gets billed at over $1k an hour.
Anyway, what now…and what’s that Friday reference? The debtors voluntarily pushed the hearing on the DIP motion and a new hearing got scheduled for Friday August 11 (today) at 10am ET. How are things looking? As of the time of this writing, like this:
Stay tuned. 🍿
📉Third Point’s Dan Loeb is Ready to Short Shorting📉
Third Point Management’s Dan Loeb sent out his 2Q’23 letter to investors last week and … well … this:
Fundamental analysis is increasingly taking a back seat to monitoring daily option expiries and Reddit message boards, as evidenced by the numerous short squeezes and manipulations of heavily shorted stocks such as AMC and Gamestop in 2021 and others this year. While we have not abandoned short selling, we continue to reduce our single name short exposure in favor of market hedges and short baskets. (emphasis added)
After covering the rollercoaster that is Tupperware Brands Corp ($TUP) and its meme frenzy (here and here), we’re inclined to agree. We think the run-up on Yellow Corporation ($YELL) in the face of bankruptcy also falls into this category. Then we have all the sh*tcos we’ve mentioned before like Joann Inc ($JOAN), Nikola Corp ($NKLA) and to a lesser extent, WW International Inc ($WW), which is spurred by the GLP-1 craze.
Don’t get us even started on Rite Aid Corp ($RAD), which we wrote about here…