4 Lessons from Yellow Corporation for Credit Pros

4 Lessons from the Yellow Corporation Failure for Credit Pros

By Michael C. Dennis

As many people know, Yellow Corporation which is the 5th largest trucking company in America recently ran out of cash, failed and filed for bankruptcy protection and ceased operations putting about 30,000 people out of work. ?

Here are some of the lessons to be learned from this sad story:

1.??Yellow Corp had been around for almost 100 years… so longevity alone does not guarantee that a customer will remain in business --- meaning that being around 99 years doesn't guarantee you'll make it to 100

2.??In 2020, Yellow received a $700 million Covid loan… so a customer’s ability to borrow huge amounts of money doesn’t guarantee its success and borrowing money doesn't solve the problem of a company's inability to generate positive cash flow and/or to report net profits rather than net losses

3.??Yellow Corp is publicly traded… and it seems clear that being publicly traded does not prevent insolvency even though a publicly traded company can, in theory, sell more of its stock to the public to generate cash

4. Just because a company has avoided bankruptcy in the past [as Yellow did several times thanks in part to concessions from its union employees and from its secured lenders] doesn't mean they will always be successful in getting the concessions needed to avoid a bankruptcy filing

By the way, I took a look at their financial statements [which are readily available since Yellow Corp is a publicly traded company], and these are some of the red flags I noted:

• Yellow reported after-tax losses in 5 of the last 10 years
• In years in which Yellow reported a profit, their after-tax profits were modest
• In the years in which losses were reported, the after-tax losses were huge
• Yellow has reported a substantial deficit net worth in each of the last 10 years
• Yellow’s current ratio is low
• Yellow’s financial leverage ratios are high signalling high levels of debt
• On the Statement of Cash Flows, Yellow reported a Net Decrease in Cash and Equivalents for the last 2 years and in 6 of the last 10 years

I'm certain that not every trade creditor was affected by Yellow's failures to the same extent. Undoubtedly, some unsecured creditors took steps to limit, mitigate, manage and potentially to transfer some or all of the risk of non-payment.

I am also sure that there were reasons why creditors chose to extend credit to Yellow Corp right up until the end, but I don't personally know what they were. If I were asked to speculate, I might suggest...

• Yellow survived serious financial problems in the past, and they'll survive this one said creditors, and/or
• Yellow is just too big to fail and/or
• The federal government will bail Yellow out... again and/or
• The Teamsters, or Yellow's secured creditors will make enough concessions that Yellow can avoid insolvency

If you know why creditors continued to support Yellow and continued to sell to them on open-account terms, I'd love to hear from you.

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