Bankruptcies can be a complex process, and there's often a misconception that only lawyers and creditors benefit. While legal fees do consume the upside, in some successful reorganizations, shareholders can see significant returns. It's a high-risk, high-reward scenario.
The most attractive opportunities often lie in the liquidation of companies with valuable assets in a stable industry. In these cases, liquidation can unlock hidden value. After settling debts, any remaining proceeds from asset sales go directly to shareholders.
Despite the Chapter 11 liquidation, Yellow Corp shareholders are banking on a significant payout.
Yellow Corp's liquidation process has seen some surprising developments. Asset sales have already brought in a hefty $2 billion – exceeding initial expectations. This is good news considering Yellow had roughly $1.5 billion in outstanding debt as of Q2 2023. Growing trends in e-commerce, demand for next-day delivery and global reshoring provide a growing demand for Yellow Corps assets.
However, the picture isn't entirely clear. While the strong asset sales are a positive sign, substantial pension liabilities could still pose a massive hurdle for any shareholder recovery. Despite this uncertainty, Yellow's financial advisor remains optimistic, suggesting there might be a "significant upside" for shareholders at current stock prices.
The million-dollar questions are, What are Yellow Corps assets worth? And two, how big are their remaining liabilities?
Breaking Down Yellow Corps Asset Value
Yellow Corp.'s asset sales have brought in at least $2 billion so far. Here's a closer look at the breakdown:
Terminals: The sale of 124 owned terminals and 3 leased ones generated a significant portion – $1.9 billion.
Leases: Selling 23 leases brought in an additional $83 million
Cash on Hand: Yellow Corp. also has $289 million in cash readily available (as per the most recent Management Operating Report - MOR).
Receivables: Uncollected customer payments (accounts receivable) amount to $91 million.
Yellow Corp. isn't just selling terminals and leases – their remaining fleet of trucks and trailers is another significant asset category and is yet to be sold. Here's what we know:
Trucks: The company has 11,700 older trucks. At an estimated average price of $15,000- $25,000 each, they could bring in an additional $175-$290 million.
Real estate: Yellow has 46 owned properties which have not yet been sold. Assuming a discount to the previously sold terminals of 20%-50%. This could bring in an additional $330m-$661m.
Trailers: Yellow Corp. also owns over 34,800 trailers. With an average estimated value of $3,000 to $5,000 each, these trailers could add another $100 million to $170 million to the Yellow Assets.
Altogether, Yellow Corp.'s trucks, trailers, and terminals assets could be worth approximately $3.2 billion to $4.6 billion. This is a significant sum, especially after factoring in an estimated 9%-13% commission on asset sales and a "haircut" on receivables for a more conservative estimate.
Break Down of Yellow Corp.'s Assets
How big are the remaining liabilities?
If the total liabilities surpass the $3.2 billion mark, it's likely there will be little left for shareholders after the dust settles. In this case, we might relegate $YELLQ to the back of our watchlists and move on. However, if the total liabilities dip below $3.2 billion, there may be money left over for shareholders.
There are $1.7bn of secured and senior claims (as per the most recent Management Operating Report - MOR).
The reality for YELLQ shareholders is that their recovery depends on two major unsecured claims.
The first unsecured claim is roughly a $300-$450 million claim for failure to give a 60-day notice to employees before their termination during the bankruptcy.
The second issue is pension fund liabilities totalling approximately $800 million. The Central States Pension Fund filed for a "withdrawal liability" when Yellow withdrew from the Central States' pension fund last summer.
Assuming an average salary of $60k-$90k for ~30,000 employers at the time of bankruptcy equals a total loss of earnings of $296m-$443m in 60 days for Yellow entire labour force. (90,000*60/365*30,000 = 443m.
The NPV of the pension liability is estimated as YELLQ’s 2022 contributions for 20 years. $62mm over 20 years at a 5.0% discount rate yields a Net Present Value liability of $779mm. Under pension regulations, employers can either pay the amount owed in a lump sum or the amount owed per year over 20 years.
Break Down of Yellow Corp.'s Total Liabilities
Ultimately, the equity return is highly binary and dependent on the unknown size of the pension liability. The market is currently ascribing less than a 30.0% probability of the Bull case occurring and an 80% probability of the worst-case scenario. The equity return is favourable on an expected value basis and could offer a meaningful upside of +300% if Yellow liquidates efficiently.
Risks
Lower than expected asset sales.
Longer than expected liquidation.
Higher than expected liabilities/claims.
Lack of liquidity and trades on the Expert Market
Disclaimer:
The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.