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Apollo Global Management has shed its financial exposure to failed US trucking company Yellow, selling off a $500mn term loan and dropping plans to extend pricey financing to fund the freight group’s bankruptcy.
The move by the private capital firm came amid jockeying over so-called debtor-in-possession financing for Yellow, which filed for bankruptcy this month with $1.2bn in debts. Such loans, once a routine part of corporate restructurings, have in recent years become a lucrative path to payouts for lenders using aggressive financial and legal engineering.
Apollo had sought to extend Yellow $142.5mn of DIP financing in bankruptcy with an annual interest rate of 17 per cent and a potential “closing fee” that could have reached $32mn.
The Apollo proposal also featured a “roll-up” component which would have given Apollo’s earlier $500mn secured loan to Yellow “superpriority” status alongside the DIP loan, putting it first in line for repayment.
But Apollo’s DIP financing proposal fell through after Yellow’s lawyers last Friday told a federal bankruptcy judge in Delaware that two other parties — MFN Partners, a Boston-based hedge fund, and Estes Express Shipping, a freight company — were suddenly interested in offering better terms.
The rival offers ensure that Apollo’s offer to fund the DIP will not be accepted when Yellow announces the winning lender, which is expected at a court hearing scheduled on Thursday.
Apollo has instead sold the $500mn loan to the hedge fund Citadel’s Citadel Credit Master Fund, according to a person directly familiar with the matter and a court filing.
Cash from DIP loans is used to pay executives, lawyers and bankers. Yellow in bankruptcy court filings described the original Apollo DIP loan negotiations as “hard-fought, arms-length, and good faith”.
But the terms disclosed appeared harsh and upset several other Yellow stakeholders. “A DIP is needed in bankruptcies and maximises overall value of estate,” said one lawyer not involved in the Yellow situation. “The problem that can arise is that it’s just too expensive and the benefits of that expense can be unevenly distributed, due to crazy fees and the like.”
Apollo said the terms of its DIP proposal were designed to incentivise the company to maximise value of the estate while efficiently proceeding through the Chapter 11 US bankruptcy reorganisation process, rather than a simpler process known as Chapter 7.
In a hearing last Wednesday, Yellow’s lawyer from Kirkland & Ellis, Patrick Nash, said the trucking group had fought against the inclusion of the $500mn loan roll-up provision. The company also took issue with a 90-day timetable to sell off assets it found rushed.
But in the frantic weeks leading up to the bankruptcy, no superior rival financing offer had materialised. Yellow and the US Treasury, the holder of the $700mn secured loan extended in 2020 during the coronavirus pandemic, were then left to reluctantly accept Apollo’s terms.
After the Apollo terms were filed publicly, Nash said in a subsequent hearing on Friday that the two new parties, MFN and Estes, had expressed interest in providing a loan that would be junior to the $1.2bn of secured debt on Yellow’s balance sheet. This implied that each was confident that asset sales would generate enough cash to pay off all the pre-existing senior debt.
Yellow said it would spend the weekend deciding which of the loan offers was best for the company. A court hearing on the DIP that was scheduled for Tuesday was postponed to Thursday.
Nash told the court that Yellow had appraised its assets at $2.1bn and that there had been multiple inquiries from interested buyers.
Raising that much via asset sales would leave enough to pay off the secured lenders as well as the DIP, with the remainder potentially going to unsecured creditors as well as common stockholders. MFN and the US Treasury together own more than 70 per cent of Yellow’s common equity.
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