Sorting out Yellow’s secured debt: Ratings agency doesn’t declare default yet

One aspect of the Yellow bankruptcy that looms in the background is that the LTL carrier has not defaulted on its senior secured debt and may not do so.

Buried within a more than 300-page document that spells out the provisions of the debtor-in-possession (DIP) financing that Yellow has obtained from Apollo Management is the history of the “roll-up” agreement that the filing says has been agreed upon by the other secured lenders.

In a bankruptcy, lenders of the DIP funds go to the head of the line when assets are sold off. But the filing on the DIP financing describes the lenders as “oversecured,” in that the assets of Yellow exceed the size of the DIP financing.

In its Chapter 11 filing in a Delaware court Sunday, the company estimated assets of $2.15 billion and liabilities of $2.59 billion.

The bankruptcy document that spells out the secured obligations says Yellow’s (NASDAQ: YELL) debt consists of $485.3 million in a senior secured term loan, believed to be held primarily by Apollo Management, about $737 million in loans from the U.S. Treasury and less than $1 million in borrowings from an asset-based lending facility. It also has about $360 million in undrawn letters of credit under that ABL facility.

Under the terms of the DIP financing, Yellow will be provided with $142.5 million in what the document describes as a “new-money senior secured super-priority debtor-in-possession facility.” Adding in the “roll-up” of existing obligations from Apollo Management, the filing puts the value of the combined DIP facility at $644 million.

But even after that, the Yellow document says, the company has “had their extensive portfolio of real estate, equipment and other assets professionally appraised at an aggregate value that, if and once monetized at such appraised aggregate value, would exceed the aggregate amount of the (Yellow) prepetitioned secure debt (debt incurred prior to the bankruptcy) and the DIP facility.”

That Yellow had not taken steps that would be considered a default on its debt was an aspect of the action taken last week by S&P Global Ratings (NYSE: SPGI), which lowered the debt rating on Yellow but notably did not reduce it to D or SD, which represents default or selected default. The latter classification generally comes after a company restructures its debt to extend payment lengths or make other changes but remains a going concern.

The debt rating was cut to CC from CCC-. As low as CC is, there actually is one additional notch below it before a D or SD can be applied.

It was published by S&P Ratings last week when the company had said little publicly but FreightWaves reported that Yellow was rapidly winding down operations.

“We believe the company is at heightened risk of a potentially imminent bankruptcy filing, nonpayment of its debt obligations, or a transaction akin to a distressed exchange,” S&P said in its report.

But the documents filed in connection with the bankruptcy on Yellow’s repayment of its secured obligations suggests that nonpayment or a distressed exchange is not imminent.

At the end of any restructuring are the shareholders, but before that comes the unsecured creditors. The bankruptcy filing lists the number of unsecured creditors at more than 100,000.

But the filing form also presents two options on the ability to pay unsecured creditors: “Funds will be available for distributions to unsecured creditors” and after payment of administrative expenses, “no funds will be available for distribution to unsecured creditors.” The option of repaying the unsecured creditors was checked in the document.

The S&P outlook on Yellow is negative, which S&P says “reflects our expectation that a default or restructuring is a virtual uncertain amid reports of an operational shutdown, volume diversions and contentious union negotiations.” It also said liquidity is “likely to become further constrained given the impact of recent developments.”

The document dealing with the DIP filing said Yellow was down to about $39 million in liquidity, though the DIP financing — which has been agreed to by the U.S. Bankruptcy Court in Delaware — eases that squeeze as Yellow moves toward a sale of its extensive assets.

The bankruptcy filing lists the number of unsecured creditors at more than 100,000. But the filing form also presents two options on the ability to pay unsecured creditors: “Funds will be available for distributions to unsecured creditors” and after payment of administrative expenses, “no funds will be available for distribution to unsecured creditors.” The option that funds will be available for unsecured creditors was checked.

The original document lists the company’s 30 largest unsecured creditors. The top five are: