The latest report from the congressional oversight commission tasked with monitoring COVID relief loans showed that less-than-truckload carrier Yellow Corp. (NASDAQ: YELL), formerly YRC Worldwide, was likely not as “critical to maintaining national security” as suggested by the Department of Defense and the Treasury.
The Friday report from the commission said that the carrier likely provided only 20% to 40% of the DOD’s LTL services, not the 68% stated by the DOD and Treasury when providing the rationale for the $700 million loan made to the company in July.
The report also calls into question the company’s increased spend on lobbying efforts ahead of the loan.
The CARES Act established various lending programs intended to save jobs at companies that were facing a COVID-induced liquidity crisis. $46 billion was established for the Treasury to fund loans to passenger and cargo airlines as well as companies that met the national security designation.
The Treasury made 11 loans under the national security carveout with the bulk of the $736 million going to Yellow.
The government received a 30% equity stake in Yellow, which was described as in “precarious financial position” at the time, as part of the lending agreement.
“Many companies faced financial uncertainty during COVID-19, Yellow included. We worked hard to ensure that our approximately 30,000 employees, mostly union members, could keep their jobs and our more than 200,000 customers would continue to receive their shipments during a crucial time,” a Yellow spokesperson told FreightWaves in a statement.
In addition to questions around the importance of Yellow to the DOD, the commission’s concerns have focused on the risk to taxpayers the loan presents and the lack of visibility DOD has into the subs of its prime contractors.
Yellow is a subcontractor of DOD prime contractor Crowley Logistics.
Correspondence the commission had with the U.S. Transportation Command, which is tasked by the DOD to provide the transportation required for national security, showed that Yellow was not likely as essential to the DOD as originally suggested.
U.S. Transportation Command said the impact of a Yellow terminating service “would be minimal and the volume readily consumed by the market,” as other carriers were available to move DOD freight.
The commission said that the statement from U.S. Transportation Command further minimizes “Yellow’s impact on national security.”
Yellow sees it differently.
“Transporting goods for the federal government is highly complex. Not all carriers can or want to do it. We provide a highly specialized service that enables our equipment to access Department of Defense facilities. This requires drivers to have specific credentials and training,” Yellow added.
A U.S. Transportation Command letter to the commission showed the DOD spent $24.9 million for Yellow’s services in 2020. It spends $7 billion annually around the world on transportation and related services. $594 million is spent on “domestic motor freight transportation.”
“The commission has worked to obtain cooperation and assess these figures from DOD, TRANSCOM and Crowley, but the DOD has yet to produce support for the 68% figure,” the report read. “The commission has requested additional information from DOD to substantiate the 68% number and is continuing to look into this matter.”
The commission previously sent a request asking U.S. Transportation Command for a breakdown of service metrics and freight costs by subcontracted carriers, but was told “TRANSCOM has no contractual authority or means to obtain this information since they do not have privity of contract with subcontractors.”
Data was provided in the letter from U.S. Transportation Command, but it is “cumulative and not segmented by individual subcontractor metrics.”
The report said that part of the inability to establish an accurate estimation of the DOD’s reliance on Yellow is due to its lengthy chain of command required for making a national security designation. “With so many layers, information is bound to get lost in translation,” the report stated.
“The commission and its staff have had difficulty navigating the DOD and its many facets. The staff had difficulty locating the right personnel within the agency to discuss the Yellow loan and, even after determining the proper track, DOD was often slow to respond to the commission.”
Lobbying spend increased in 2020
The report called into question Yellow’s increased spend on lobbying efforts in 2020, noting the company spent $570,000 in the year compared to no spend in 2019, a year in which it booked a more than $100 million loss. Yellow spent only $80,000 in 2018 and $75,000 in 2017 on lobbying.
“The commission makes note of the correlation between lobbying the government and Yellow’s ability to secure a $700 million loan,” the report stated. “The Treasury confirmed that several Senators and members of Congress sent letters to Treasury urging them to underwrite Yellow’s loans.”
However, from 2009 to 2013, Yellow spent in excess of $500,000 annually on lobbying.
The report said the company was planning to apply to the government for a $1 billion bailout in 2009, when it was facing bankruptcy. Instead, it was saved through a debt-for-equity swap negotiated with lenders. 2009 was the high-water mark for lobbying, with the company spending $800,000.
“We are proud to have received the support of many Democrats and Republicans in Congress. In 2020, we reached a mutually beneficial agreement with the US Department of Treasury to protect American jobs while benefitting US taxpayers,” the Yellow statement read.
Money mostly spent
$300 million of the first tranche of the loan, allocated to catch the company up on “healthcare and pension liabilities, real estate and equipment leases, and interest payments on debt,” was disbursed in 2020.
$251 million of the $400 million second tranche aimed at replacing older equipment had been disbursed as of January. The company will spend the remainder of that tranche in the first half of 2021, according to the report.
The commission said that “Treasury and DOD made missteps in deeming Yellow as critical to national security and executing the loan” and that it “hopes to get clarity regarding its questions surrounding the national security designation given to Yellow, as well as information substantiating the 68% figure.”
The Treasury set the terms of the loans and has admitted to not fully underwriting the loans to traditional risk and credit standards. It has said it was encouraged by members of Congress to take losses on the loans as the program’s intent was to address an immediate liquidity crisis.
“Our agreement with the U.S. Department of the Treasury was mutually beneficial. The department invested in the future of the company and our 30,000 employees with the belief that it would pay off. Today taxpayers are beneficiaries of this investment,” Yellow concluded.