July 10, 2023

Waiver gives Yellow breathing room but with strict requirements from lenders


Yellow Corp. bought more time as it fights for survival with a deal that waives certain covenants under its credit agreements.

The agreement was effective retroactive to June 30 and filed with the Securities and Exchange Commission late Friday. 

According to the 8-K filing with the SEC, the amended and restated credit agreement between the LTL carrier and a consortium of lenders did have a testing deadline for covenant compliance on June 30. That now has been delayed.

In a prepared statement released to FreightWaves, Yellow said the agreement for one quarter was with the U.S. Treasury and for two quarters with its term lenders. 

The agreement also waives a covenant compliance deadline that had been in place for Sept. 30. The waiver in question is described as testing Yellow’s compliance with a “minimum consolidated EBITDA financial covenant.”

As part of the waiver agreement, the lenders will require Yellow (NASDAQ: YELL) to provide its lenders with regular reports on the state of its finances.

Beginning Wednesday, Yellow will be required to provide the lenders with a weekly “liquidity report.” In that report will be the total amount of liquidity at Yellow, including unrestricted cash on hand, cash on hand that is held for payroll and to settle contracts, and the amount of money — defined as “availability” — that the company is holding. 

One piece of positive news for Yellow is the requirement that liquidity not fall below $35 million. Elsewhere in the 8-K, liquidity at Yellow is said to be in excess of $100 million. 

The lenders will also appoint an operational adviser at Yellow. That person, according to the SEC filing, “will, among other things, provide financial planning and analysis services and assistance creating the aforementioned budgets.”

The budget reference is to a requirement that beginning this week, Yellow must deliver weekly to the lenders a 13-week “consolidated operating budget and a budget variance report.” The report will spell out actual results against the amount budgeted in the 13-week period. Beginning in two weeks, a monthly supplement to each budget will be required under the terms of the waiver.

Yellow will be getting other hands-on involvement from the lenders. Under the agreement, they have the right to designate a representative who would be a “non-voting observer” of any meetings of the company’s board of directors or committees of the directors. The agreement also calls for a weekly call with the operational adviser and monthly calls with Yellow’s senior management.

“We are pleased that Yellow has successfully negotiated adjusted EBITDA covenant waivers to its existing credit agreement,” Yellow said in its statement. “This, along with liquidity preservation efforts such as requesting to defer select health welfare and pension payments for July and August should give us additional runway to negotiate with the [Teamsters] on a solution that provides material wage increases and aligns both parties on modernization of the company.”

A report issued Monday morning by the transportation team at Deutsche Bank led by Amit Mehrotra said the “bottom line” in the agreement is “the precarious position of YELL, in our view. Lenders are clearly taking a much more active approach on the day to day operations than ever before. We think this is more noteworthy than the limited waivers, given potential for additional business to exit the company as customers divert volumes.”

The report also noted that the liquidity at Yellow said to be in excess of $100 million is still down from a figure at the end of March of $168 million.

“Our customers want us to be here, even with all the noise around the company our shipment counts have held up and that’s crucial for us to work through this period while we get to negotiations,” Yellow said in its statement to FreightWaves. 

The SEC filing also disclosed that Yellow has recently sold an “obsolete” terminal in Compton, California, for $80 million. Yellow said the sale was “consistent with our modernization strategy and will not have a material impact on jobs.”

S&P downgrades Yellow debt

The waiver agreement comes just days after a second ratings agency downgraded the publicly traded debt of Yellow. 

S&P Global Ratings last week cut the company’s rating to CCC-. Ironically, even as conventional wisdom has Yellow on the brink of collapse, the rating given by S&P Global Ratings still has room to fall on its way to a rating of D or SD, which occurs when a company is deemed to have defaulted on its debt. (SD stands for selective default and is often given to debt that is restructured rather than suffering an outright default.) S&P has a group of ratings under a classification of C or CC that is below the CCC- rating now applied to Yellow. 

But the S&P action from Thursday takes its rating of Yellow to a level less than that of Moody’s, which moved down its rating on Yellow in late June. The Moody’s action set Yellow’s rating at Moody’s (NYSE: MCO) to Caa1. The CCC- rating at S&P Global (NYSE: SPGI) is generally seen as two notches less than Caa1, which aligns with an S&P rating of CCC+. 

The S&P Global downgrade said Yellow faces “significant” debt maturities into 2024, with a $567 million senior secured term loan that is due in June 2024 and a loan from the U.S. Treasury of $729 million issued by the Trump administration in 2020 that is also due in 2024. 

The S&P report on its downgrade also noted the reluctance of the Teamsters to negotiate with Yellow. “We believe contentious labor contract negotiations will make it more difficult for the company to implement its new operating strategy across its central and eastern network,” the report said. “In our view, Yellow will need to address both maturities and the labor contract to avoid a default.”

As well as lowering the rating on Yellow debt, S&P Global Ratings listed the outlook for Yellow as negative. “The negative outlook reflects our expectation that Yellow is vulnerable to a payment default or distressed exchange over the next 12 months.” 

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