Why goodwill can be make or break in a bankruptcy

When the value of a brand is seen to have eroded, the chances of a company emerging as a going concern are significantly depleted.

The liquidation of bankrupt trucker Yellow Corp is well underway, and it now seems this process will be completed with considerable losses to unsecured lenders. The fading of any remaining hopes for a reorganised Yellow Corp returning to the market serves as an example of the “melting cube” nature of some assets in bankrupt entities.

A melting ice cube, a concept relevant for any distressed debt investor, via private debt fund or otherwise, is any asset or entity that may quickly become worthless in the absence of protective action.

On 12 December, Judge Craig Goldblatt approved the sale of 130 of Yellow Corp’s terminals. In total, 21 entities, mostly other ‘less-than-truckload’ (LTL) carriers and their real estate arms, committed to purchasing those properties.

Yellow filed for bankruptcy protection on 6 August, when its assets included 12,700 tractors and about 37,000 trailers, according to reports.

It is only in recent weeks that Sarah Riggs Amico, executive chair of Jack Cooper Transport, a company that specialises in hauling cars from assembly plants to dealerships, launched a long-odds, last-minute going concern revival plan. In principle, that plan might have allowed junior creditors at least the consolation of equity interests in a continued enterprise. However, it appears to have come too late.

The ready availability of buyers for those terminals illustrates a critical point: whatever hole was created in the market by Yellow Corp’s withdrawal has since been filled. There are plenty of healthy LTL firms on the scene. The Georgia-based LTL company Saia, for example, had revenue of $775.1 million in Q3 2023, an increase of more than 6 percent on the year before, and an impressive 11.6 percent increase quarter-on-quarter.

The critical asset that melted away from Yellow Corp between August and November was goodwill – it is precisely the value that a company possesses by virtue of being a going concern, with regular shipper relationships, a brand name, etc.

Goodwill can sometimes last a long time. Potential car buyers who valued the brand name Chrysler in 2009 were, for the most part, still around for the sale to Fiat in 2014. So, offering the use of that brand to Fiat was offering something important.

Amico’s revival plan was premised on the willingness of the US Treasury Department to let Yellow Corp postpone the repayment of a $700 million covid-related rescue loan from 2020. There were legal obstacles to the Treasury’s acceptance, given that it could do better by accepting its share of the proceeds of the company’s continuing asset sales.

A potentially greater problem than these legal issues remains that Yellow Corp’s brand is now tarnished: its business relationships (and the goodwill garnered with them) when a going concern have gone elsewhere.

This is a case that many debt fund investors will want to study with interest.

Write to the author at Christopher.f@pei.group

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