Why Trucking Giant Yellow’s Shutdown Could Cost Taxpayers Money

Date: Wednesday, August 2nd, 2023
Source: Wall Street Journal

The collapse of trucking giant Yellow risks saddling American taxpayers with financial losses.

The federal government lent Yellow $700 million during the height of the Covid-19 pandemic in 2020, providing a bailout that helped the company keep operating and attempt to expand its business. The Treasury Department took a roughly 30% equity stake in Yellow. At least three government investigations have since questioned the Trump administration’s handling of the loan.

Now, Yellow has shut down its operations and is expected to file for bankruptcy following a string of mergers that left it bulging with debt and a standoff with the Teamsters union. Treasury’s equity stake could be wiped out. Whether the federal government recovers the money it lent would likely depend on how much Yellow raises by selling real estate and other assets in bankruptcy. But some lawmakers and analysts have said taxpayers could lose money.

“I expect Treasury is just going to take its licks here,” said Adam Levitin, a bankruptcy expert at Georgetown law school.

A Treasury spokeswoman said the department’s priority in the event of a bankruptcy was to recover as much of the loan as possible.

A spokeswoman for Yellow said the company expects to pay back its loan in full. She said Yellow followed Treasury’s rules in applying for the loan and complied with the loan agreements.

The company’s stock has soared since Yellow halted operations, finishing Tuesday up 121% at $3.90 a share, the latest in a series of jumps.

In addition to making $68 million in cash interest payments, Yellow has paid back $230 of its principal on the loan, according to a July 1 Treasury report.

Yellow’s shutdown comes as the Biden administration is offering billions in government subsidies to support companies producing clean energy and semiconductors. Previous failures of companies that took government support—such as Solyndra, the solar company that failed after getting a government loan guarantee—became ammunition for opponents of such aid for years.

The administration hasn’t indicated plans to give any more aid to Yellow, whose collapse could cause the loss of nearly 30,000 jobs. The Pension Benefit Guaranty Corporation, which helps backstop pension plans, said it is monitoring the situation. Late last year, the Biden administration distributed $36 billion to shore up a multiemployer pension plan that Yellow participates in, part of a roughly $90 billion aid package Congress had approved for such plans.

The government’s pandemic-era aid has caused headaches in the past. As much as $100 billion of the more than $5 trillion the government offered during the pandemic was stolen or improperly disbursed, the Secret Service has estimated.

Yellow, which had neared bankruptcy before, said in 2020 it would struggle to make its debt payments when the pandemic shut down factories and stores. The Treasury Department gave Yellow the loan under a $17 billion program created by Congress for supporting companies necessary for protecting national security.

Yellow provided shipping for the military, which the Treasury said made it eligible for the loan. Lawmakers have since said other trucking companies could have taken over that work.

Yellow employees and the Teamsters union lobbied lawmakers and the Trump administration for the money, a congressional report said. The union declined to comment.

Pentagon staff at one point recommended the agency decline to recognize the trucking company as critical for national security, according to two congressional inquiries.

Soon after that, then-Treasury Secretary Steven Mnuchin called then-Defense Secretary Mark Esper, who designated it as critical, according to the congressional investigations.

Esper declined to comment. He has previously said he made the certification at the recommendation of Pentagon staff.

A spokesman for Mnuchin didn’t respond to a request for comment. In 2020, Mnuchin told lawmakers that the loan was risky and that he was under pressure to extend credit to struggling firms, even if it meant losing money. “That doesn’t mean I don’t think we’re secured and we’ll get our money back,” he said.

Of the $17 billion available under the national-security fund, the government only lent $735 million, meaning Yellow received 95% of the allocated funds through the program.

“This company was not essential to national security, and so I question why the loan was entertained,” said Rep. French Hill (R., Ark.), who led a report on the loan for the bipartisan Congressional Oversight Commission.

The Treasury made the Yellow loan in two tranches, one worth $300 million to cover pre-existing business expenses and the other worth $400 million to pay for the purchase of new tractors and trailers.

Yellow had roughly $1.5 billion in total long-term debt as of March 31, according to its most recent quarterly filing. For recovering the first tranche of debt, the Treasury is third in line behind other creditors, Hill said. Roughly $567 million was owed to a group of affiliates led by Apollo Global Management, the filing showed. Yellow also had a $500 million line of credit with a group of banks.

Paying back the more-senior creditors could ultimately eat up the value of Yellow’s assets, Levitin and Hill said. The collateral for the second tranche is the equipment Yellow purchased with the money, which has likely lost value, they said.

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