In the News

Hill: Yellow bankruptcy serves as warning about government loans

by Alex Thomas
Arkansas Democrat-Gazette
July 28, 2023

WASHINGTON -- U.S. Rep. French Hill, R-Ark., says there are lessons for the federal government in Yellow Corp.'s bankruptcy: Government officials need to "think long and hard" about issuing loans to companies, and if an agency has such authority, there should be strict rules in place.

Hill's comments follow the 99-year-old trucking company declaring Chapter 11 bankruptcy Sunday, three years after the Treasury Department provided Yellow with a $700 million loan amid the coronavirus pandemic. The Nashville, Tenn.-based company will undergo liquidation with 30,000 workers now unemployed.

"Generally, I think in times of crisis, the federal government intervening in individual cases usually leads to problems," the congressman from Little Rock told the Arkansas Democrat-Gazette on Wednesday. "When the government gets involved in the affairs of an individual private business, that can lead to trouble."

Hill has monitored Yellow since the company received the loan in July 2020. California Republican Rep. Kevin McCarthy, previously the House of Representatives minority leader, named Hill to the bipartisan Congressional Oversight Committee responsible for tracking Treasury Department spending under the Coronavirus Aid, Relief and Economic Security Act.

The committee concluded its work in June with the release of a final report on Yellow. Hill was the last standing member of the body as other members no longer served in Congress.

"It was literally to oversee taking federal taxpayer money at the Treasury in the Exchange Stabilization Fund and leveraging that with the Federal Reserve and lending that money," Hill said of the committee. "Whether through one of the Federal Reserve programs or directly appropriated money from the Treasury to a selected business in the statute."

Yellow applied for a loan through the Treasury Department's national security loan program given its standing as a Defense Department contractor. The trucking company -- at one point the fifth-largest in the nation -- contended it provided 68% of less-than-truckload shipping services to the department. The committee later determined the Defense Department did not independently verify Yellow's claim.

Congress approved the CARES Act in March 2020, setting aside $2.2 trillion in economic relief to help families, business and local and state governments at the start of the coronavirus pandemic. Lawmakers set aside $17 billion for loans to assist businesses "critical to maintaining national security," but the statute did not define conditions for qualified companies.

The Treasury Department administered only 11 loans amounting to $735.9 million, with Yellow taking most of that money.

Yellow received the $700 million loan through two tranches: a $300 million portion intended for covering health care, pension liabilities, interest payments and leases, and a $400 million piece for purchasing tractors and trailers. The Treasury Department additionally acquired a 29.6% equity stake in Yellow.

According to Yellow's financial report from the first quarter of 2023, the company had $1.5 billion in debt, including $729.4 million owed to the Treasury Department. Yellow CEO Darren Hawkins said Sunday the company intends to "pay back the CARES Act loan in full."

"It was a catch-all eligibility for a CARES Act direct loan, meaning the Treasury Department did not have the responsibility to do additional due diligence to ascertain whether or not the entity was in fact essential to national security," Hill said of the program.

"I think that was too loose. It was too broad a designation. It should have required more careful documentation."

Yellow's financial health showed troubling signs in the years predating the pandemic. The company acquired multiple truckload carriers before the Great Recession, resulting in additional debt. Jack Atkins, a managing director and research analyst at financial services firm Stephens, said Yellow never fully integrated those acquisitions.

"They were really left in a really challenged position financially during the Great Recession," he said. "They almost went bankrupt in 2009."

Yellow worked with banks on a debt-for-equity conversion plan and debt restructuring outline. The company additionally reached a compromise with union workers to continue operations, including a 15% cut in wages and concession of pension contributions.

"The union really made some significant sacrifices to keep Yellow in business," Atkins said. "That is an important thing to remember here because that haunts [Yellow] all the way to the present."

Yellow maintained a significant amount of debt, hindering investments in equipment and services. While the company saw stronger earnings in 2021 and 2022, Atkins said Yellow failed to refinance its debt during a period of low-interest rates.

The bankruptcy additionally followed tense negotiations between Yellow and the International Brotherhood of Teamsters union. Yellow filed a lawsuit in June alleging the Teamsters -- which represented 22,000 Yellow positions -- blocked the company's strategy to integrate operations and networks amid labor discussions. The trucking company said at that time it would "likely not survive" without business changes.

The union called the lawsuit "baseless," accusing the company of blowing through the Treasury Department loan after "decades of gross mismanagement."

The Teamsters prepared a strike against Yellow after a pension fund board announced it would suspend health care benefits and pension accruals for Yellow workers. The Central States Board of Trustees issued its decision after Yellow failed to make payments eclipsing $50 million into related accounts.

The strike was averted, but Atkins said Yellow's fate had been sealed, describing the company's situation as "a slow-moving disaster."

"At each one of these sort of moments, their customers look up and say, 'Hold on, wait a minute. Do I really want to have my freight trapped in a network that could face a strike or go out of business?'" he said.

"Both sides bear fault for this," Atkins added.

Hill, a former banker and investment manager, wasn't surprised by Yellow's bankruptcy.

"It was on the verge of bankruptcy in 2020, and it has been a junk-rated company for many years," he said. "The company was over-leveraged. Its management and board of directors were never able to implement a winning strategy that allowed the company to pay down that debt and produce an acceptable return to shareholders."

U.S. Rep. Rick Crawford, R-Ark., who leads the House Subcommittee on Highway and Transit, tied recent inflation and union discussions as main factors in Yellow's end.

"While there are concerns around supply chain woes, our trucking industry is resilient and I don't foresee any long-term disruptions due to this bankruptcy," the Republican from Jonesboro told the Democrat-Gazette in a statement.

"I also remain hopeful that Yellow employees will find new jobs in this competitive industry as other companies seek additional truckers to service a larger number of clients."

The commission's report warns against Congress allowing another sector-specific loan program in the future. The report describes the national security loan program as "redundant," arguing businesses could have instead sought assistance through other efforts, including programs targeting larger businesses with access to capital markets.

The report additionally states if Congress creates another sector-specific loan program in future emergencies, lawmakers should establish eligibility requirements, including limiting funds to companies in good financial standing.

Hill said lenders and agencies would need to maintain a due-diligence responsibility in paying back loans on schedule.

"All this speaks to my simple, number one guardrail," he said. "Think long and hard about making direct loans to private businesses from the federal government in a crisis. You're going to get in trouble. It's not going to work out well."

The Treasury Department did not return a request for comment.

Atkins said he does not believe Yellow's demise will result in significant price changes for consumers as shippers ranging from industrial companies to retail stores move to Yellow's competitors.

"It's almost hard to wrap my arms around the fact that Yellow actually has gone bankrupt, even though this has been something that we've been very vocal on for the better part of the last couple of months as we saw this building," he said.

"This is a company I think most folks thought would always find a way to keep the lights on, and that didn't happen."