Light SA’s board intends to have the company withdraw from the controversial and contentious in-court restructuring process it commenced a few months ago. Whether the Brazilian utility can indeed withdraw from the proceeding, however, depends on its creditors approving such a request. Given the contentions relationship Light has had thus far with its creditors, the plans to restructure its debt out-of-court may not be feasible, paving the way for a contested plan process, which may lead to an insolvency or creditor-proposed plan.

In this article, the Debtwire legal analyst team examines the legal issues related to the potential bankruptcy withdrawal request, highlighting how it could ultimately streamline the negotiations among the involved parties over the terms of a fair debt restructuring proposal.

Source: Debtwire’s Restructuring Database

Light’s multibillion-dollar debt restructuring process has been marked by litigation between the company and its financial creditors related to, among other things, certain controversial protective rulings made in favor of the company. These include the granting of a precautionary measure prohibiting creditors from commencing or moving forward with individual lawsuits against the company and a decision admitting a judicial recovery request made on behalf of Light’s holdco. The judicial recovery filing strategy was adopted by Light in order to circumvent restrictions that prohibited public electric energy services providers holding concession agreements with the country, such as subsidiaries Light Servicos de Eletricidade SA and Light Energia SA, from filing for bankruptcy.

Source: Debtwire’s Restructuring Database

Until recently, all appeals filed by creditors against the decisions issued by the court handling Light’s bankruptcy were by the Rio de Janeiro appellate courts, and to collect on amounts owed to creditors outside of the protections granted to the company were similarly overruled by the court. Thus, the indication that the company could withdraw from the bankruptcy process in order to move forward with out-of-court negotiations is surprising.

However, such a decision is not one for the company to make on its own. According to Sections 35, I, d and 52, § 4 of Brazilian bankruptcy law, judicial recovery withdrawal requests made after a court admits the protection request must be approved in a creditor meeting. The creditor support for this sort of request must be provided by the majority of claims impaired by the process in terms of amount, as set forth in Section 42 of the law.

At first glance, obtaining creditor support for this purpose does not appear to be an issue. Indeed, creditors have been arguing since Light first made its pre-insolvency filing that Light concessionaires are not permitted to file for bankruptcy or have a bankruptcy petition admitted by the court.

Source: Debtwire’s Restructuring Database

However, things could be more complicated than initially expected and creditors may prefer to remain in a judicial recovery proceeding. If Light does not receive sufficient creditor approval to withdraw from the case, the controversial rulings issued in favor of the company that have temporarily protected it from its creditors may be just temporary. The culmination of a judicial recovery process – the approval (or rejection) of the debt restructuring plan proposed by the company – may be the real leverage for creditors in a restructuring.

According to Brazilian law, if creditors reject the reorganization plan proposed by the company, then either: (i) the judicial recovery will be converted into a liquidation proceeding, in which the management of the business would be put in the hands of a judicial manager, and the assets of the company would be sold to repay creditors; or (ii) creditors could present an alternative plan, which could include, among other restructuring measures, a debt-for-equity swap transaction that would ultimately result in the creditors taking the control of the company.

Section 56, § 6 of the bankruptcy law provides that, to be submitted to a vote, creditor-proposed plans must meet certain requirements, including that (i) the plan must not impose new obligations on the company and its shareholders, nor lead them to a situation worse than they would be in the case of liquidation; and (ii) the creditor-proposed plan has the support of either 25% of the total claims impaired by the bankruptcy, or 35% of claims attending the meeting in which the company’s plan was rejected.

In Light’s case, it seems that these supporting percentages would not be hard to achieve, as the restructuring plan originally proposed by the company was considered “immoral” and “unfair” by a relevant portion of the impaired claimholders.

Therefore, in order to avoid the risk of losing control of the business and the debt restructuring process, the Debtwire legal analyst team believes that Light will try to reach an agreement with creditors on the terms of a plan, instead of filing a one-sided case withdrawal request. In the best-case scenario, this agreement could directly provide for a fair debt repayment proposal, via a consensual reorganization plan that would put an end to the disputes. Alternatively, such a plan could at least set the basis for an out-of-court renegotiation, in exchange for the creditors’ support for the closing of the case.

In both scenarios, creditor support could be evidenced by the presentation of consenting letters, thereby making a creditor meeting – to vote on either the plan or the withdrawal request – unnecessary. Just like the creditor-proposed plan possibility and related requirements, this alternative mechanism to evidence creditor support on a debtor proposal was introduced in the country’s bankruptcy regime via a major reform that was signed by the president in late 2020, became valid in early 2021 and was implemented in certain high-profile Brazilian bankruptcy cases, including Renova Energia, Samarco Mineracao and Atvos.

One way or the other, it seems that Light SA’s debt restructuring talks with creditors – which have been moving at a slow pace during the last few weeks – are expected to be streamlined in the near-term, as a consequence of the company’s recently revealed intention to withdraw from its contentious bankruptcy process.

Last month, Samarco Mineracao’s reorganization plan was sanctioned by the court overseeing its judicial recovery process. The Brazilian mining company’s proposal relied on the terms of an agreement reached with its shareholders (Vale SA and BHP Billiton) and an ad hoc group of bondholders, putting an end to a long-running dispute that had been ongoing since the company filed for bankruptcy in April 2021. In addition, Credito Real bondholders reached the 50% threshold required for approval of the Mexican non-bank financial institution’s Restructuring Support Agreement (RSA), thereby opening room for a concurso mercantil filing, expected for the short-term.

Speaking of concurso filings, in August, Tangelo (formerly Mexarrend) commenced an in-court debt restructuring proceeding with the Second District Court for Commercial Insolvency Matters in Mexico City, which admitted the company’s bankruptcy protection request and appointed a visitador auxiliary to assist it in determining whether the company meets the law criteria established for a Mexican bankruptcy proceeding. In Brazil, online travel agency 123 Milhas filed for judicial recovery to restructure roughly BRL 2.3bn in debt.

Source: Debtwire’s Restructuring Database

Also in August, Chile-based salmon farmer Nova Austral presented its debt restructuring plan, centered on a debt-for-equity swap and asset sale proposals. The third group of AlphaCredit subsidiaries also presented its creditor agreement, while the creditor agreement proposed by the second group of subsidiaries of the Mexican non-bank financial institution was sanctioned by the court and appealed by dissident creditor AMF Mezzanine.

Source: Debtwire’s Restructuring Database

Other significant appellate-related news from last month included (i) an injunction granted by the Superior Court of Justice to suspend the appellate court ruling declaring Coesa (formerly OAS) insolvent; (ii) the rejection of an appeal filed by the Rio de Janeiro Public Prosecutor on the appointment of two firms to jointly act as judicial manager in Oi SA’s judicial recovery process; and (ii) the rejection of the appeal filed by Americanas SA creditor Bradesco against the participation of two foreign affiliates of the Brazilian retailer in the judicial recovery.

Source: Debtwire’s Restructuring Database

Light SA’s renegotiation talks with creditors were moving at a slow pace last month, with the electricity services provider focusing on efforts to bar the individual execution lawsuit commenced by Santander in July. Also in August, three funds managed by Altana Wealth filed a new breach-of-contract lawsuit against the Republic of Venezuela over unpaid bonds, this time adding additional counts related to both bonds and oil-indexed payment obligations. In other news regarding individual lawsuits, Nova Austral was served with a lawsuit filed by Administradora de Fondos Moneda containing accusations of alleged fraud and seeking USD 300m. The filing is very similar to another suit, filed by investor Fratelli Investments in July.

Source: Debtwire’s Restructuring Database

August also saw Brazilian auto parts maker Sifco SA request the reopening of its Chapter 15 recognition case to seek an order for turnover of funds and approving the redemption of bonds. Mexican media group TV Azteca agreed to initiate a mediation proceeding with a group of bondholders in order to reach an agreement concerning the involuntary Chapter 11 case filed by the creditors against the company.

Source: Debtwire’s Restructuring Database

Offshore Drilling Holding subsidiary LaForta Gestao e Investimentos was authorized to dismiss its Chapter 11 case and to make the distribution to creditors of proceeds from the sale of the La Muralla IV drilling rig. In addition, Grupo FAMSA secured bondholders acquired the control of the Mexican retailer’s US assets.

Other court developments of interest last month involving Latin American distressed companies include (i) Americanas and lenders Banco Safra and Banco Bradesco fighting over the inclusion of certain guarantee-related claims held by the banks in the company’s in-court restructuring process; (ii) Cimento Tupi unsecured creditors asking the court to replace the judicial manager due to alleged lack of impartiality; and (iii) Oi asking the court to extend the stay period of its bankruptcy protection.

The months ahead

Tunghsu Group’s bondholders appear to have found the magic formula for enforcing the terms of New York law-governed bonds in Hong Kong – head to New York first.

Bond investors Zhang Rui Kang and Le Huan-Hsin have been attempting to enforce their rights ever since BVI-incorporated bond issuer Tunghsu Venus Holdings Limited and PRC-incorporated parent guarantor Tunghsu Group failed to redeem their USD 342m (outstanding) 7% guaranteed bonds due Jun-2020 in suspicious circumstances.

First they wound-up Tunghsu Venus in the BVI. Then, they obtained a default judgment in New York against both Tunghsu Venus and Tunghsu Group for the outstanding principal and interest owed under the bond/guarantee. Finally, they commenced two sets of proceedings in Hong Kong – the first to recognize the New York judgement (so that it could be enforced against any assets in Hong Kong) and the second to sue Tunghsu Group and various directors for: (i) breach of the guarantee; and (ii) inducing or procuring the companies to breach their payment obligations under the notes by allowing Tunghsu to siphon off USD 6.4bn of cash prior to the notes maturing in breach of their fiduciary duties.

In late July, the Hong Kong proceedings took centre stage as Tunghsu Group attempted to set aside previous orders the bondholders had obtained allowing them to serve their claims on Tunghsu Group and the directors outside of Hong Kong. If the orders were set aside, the claims could not proceed.

The good news for the bondholders was that their judgment recognition claim survived the test. Deputy High Court Judge MK Liu readily accepted that bondholders stood to receive a legitimate benefit if the New York judgment was ultimately recognized (in that they could, for instance, use it to seek examination orders against the directors, or to seize any undisclosed assets which might at some point flow through Hong Kong) and granted leave.

But bondholders weren’t so lucky in respect of their second set of claims. In short, Judge Liu concluded that their claims against Tunghsu Group and the directors failed to show a serious issue to be tried. In respect of the guarantee claim, that was because — just like in the controversial Leading Holdings decision released only days earlier — the court concluded that the bondholders – as beneficial holders of the bonds — had no rights under the bond indenture to sue for payment. Only the registered “Holder” of the notes could do so because Tunghsu Group had only guaranteed Tunghsu Venus’ obligations to Holders.

If that sounds like an odd conclusion, there’s good reason. In finding that bondholders had no rights against the guarantor, the Hong Kong court essentially ignored or discounted the fact that a New York court had already concluded that Tunghsu Group was liable to bondholders Zhang and Le under the very same guarantee set out in the very same New York law-governed indenture.

On the face of it, that’s a crazy result. But it does help to delineate a clear enforcement path for holders of New York law-governed bonds in Hong Kong. Head straight to the Hong Kong courts and you’ll find out you have no rights against an issuer or guarantor. But make a detour to the New York courts first and you’ll most likely be able to then waive your New York judgment in front of the Hong Kong court with glee.

A messy default 

Tunghsu Venus’ USD 342m (outstanding) 7% guaranteed bonds due June 2020 were issued in 2017 under a New York law-governed indenture and guaranteed by its PRC-incorporated parent, Tunghsu Group Co. As is customary, a single global note was executed and registered in the name of a nominee of the common depositary for Euroclear and Clearstream – initially Citivic Nominees Limited. The trustee of the bonds was Hong Kong-incorporated Citicorp International Limited.

Shortly before the bonds were due to mature, the Shijiazhuang, Hebei-incorporated conglomerate announced that it had insufficient resources to repay them. Then, on 30 June 2020, Tunghsu’s 2019 financial statements were issued with a qualified audit opinion (along with those of its Shanghai-listed controlled-affiliate Tunghsu Optoelectronic) due to their inability to verify 97% of the group’s (apparent) liquid assets thanks to unexplained advance payments, accounts receivables and bad debt provisions.

Not surprisingly, that caused bondholders to act:

1. first, two investors — Zhang Rui Kang and Le Huan-Hsin — took steps in the BVI to liquidate Tunghsu Venus so that the flow of the bond proceeds within the group could be examined. Statutory demands were issued on 16 June and 14 July 2020 and a winding-up petition presented on 4 December 2020 (after Tunghsu Venus unsuccessfully challenged the statutory demands). The BVI court would up Tunghsu Venus in February 2021 (apparently without any concern as to whether the bondholders had standing to petition as a contingent creditor);
2. next, Zhang and Le sued Tunghsu Venus and Tunghsu Group in New York, seeking damages for their failure to pay outstanding principal and interest under the bonds and guarantee. The New York court granted both bondholders a default judgment on 1 September 2021 (NY Judgment);[i] and
3. finally, Zhang and Le commenced two sets of proceedings in Hong Kong. The first sought recognition of their New York judgment (so that it could be enforced in Hong Kong against any assets of Tunghsu Venus and Tunghsu Group in the jurisdiction. The second was filed by Zhang, Le and four other (related) bondholders — Creative Hub Limited, Alliance Jumbo Limited, Le Yi-Ting and Peak Equity Group. In those proceedings: (i) the four ‘new’ bondholders sought damages from Tunghsu Group for breaching its obligations under the guarantee (Zhang and Le not needing such a judgment because they had already obtained one from the New York Court); and (ii) each of the bondholders sought damages from Tunghsu and various directors for inducing or procuring Tunghsu to breach its payment obligations under the notes and guarantee by allowing the company to siphon off USD 6.4bn in funds prior to the bonds maturing in breach of their directors’ duties.

As those enforcement proceedings rumbled on, Tunghsu engaged Admiralty Harbour Capital and announced a restructuring proposal (in December 2020) which called for 15% of all outstanding principal to be repaid upfront, with 79% to be amortized over three years (with a personal guarantee from 49.06%-shareholder Chairman Li Zhaoting) and the remaining 6% principal and all unpaid accrued interest to be written off. The restructuring collapsed, however, after a Kirkland & Ellis-advised ad-hoc group (which included Zhang and Le) remained unconvinced of the group’s ability to meet the proposed amortization payments and continued to press for better terms.

Suing PRC residents in HK

With no feasible restructuring on the horizon, bondholders had little option but to push forward with their enforcement efforts. To do so in Hong Kong, they needed to serve their two sets of Hong  Kong proceedings on Tunghsu Group and the directors where they resided (in the PRC), something which required leave of the court.

The bondholders obtained leave from a Master of the High Court in 2021. But Tunghsu then filed two applications to set aside the Master’s orders. It was those applications which were heard by Deputy High Court Judge MK Liu on 21 July.

Bondholders may seek recognition of a New York judgment 

First up, Deputy Judge Liu considered whether Zhang and Le should be granted leave to serve their writ seeking recognition of their New York judgment on Tunghsu in the PRC.

To be granted leave, Zhang and Le needed to demonstrate that there was a real prospect of them receiving a legitimate benefit if leave was granted and the writ was served on Tunghsu. That benefit need not be monetary or tangible in nature; it could be indirect or prospective, provided that it served some useful purpose.

Tunghsu argued that no such benefit arose because the bondholders would never be able to enforce the judgment in Hong Kong – Tunghsu had no Hong Kong assets and none of its subsidiaries had any real business operations or assets in Hong Kong. But Deputy Judge Liu agreed with the bondholders that: (i) Tunghsu might have assets in Hong Kong at some juncture in the future (after all, the group had raised capital in Hong Kong in the past and continued to be served by advisers in the jurisdiction); and (ii) enforcing the judgment could allow further investigations to take place with a view to locating assets, including by seeking to examine the directors. Those two factors, together with the inference to be drawn from the fact that Tunghsu had considered it necessary to spend substantial time and money resisting enforcement of the New York judgment in Hong Kong, were sufficient to show that a benefit arose.

Accordingly, the judge dismissed Tunghsu’s setting-aside application and left the bondholders free to serve the proceedings in the PRC.

But they can’t sue a bond guarantor in Hong Kong

Next, Deputy Judge Liu considered whether to grant leave for the second set of Hong Kong proceedings commenced by the bondholders to be served on Tunghsu and the directors in the PRC. That’s when things got more controversial.

In order for leave to be granted, bondholders needed to demonstrate a serious issue to be tried. That’s because courts will be reluctant to force foreign parties to litigate in Hong Kong if the case argued against them is hopeless or lacks reality. Unfortunately for the bondholders, that’s exactly how the court felt about both their guarantee claim against Tunghsu Group and their claims against the directors.

Critically, Deputy Judge Liu concluded that the bondholders had no standing to enforce the guarantee. Why? Because under the terms of Tunghsu’s indenture:

1. Tunghsu Group guaranteed the obligations of Tunghsu Venus to each “Holder of a Note… and to the Trustee and its successors and assigns”; and
2. for so long as the notes were held in global form:
   1. the common depositary (or its nominee) would be considered as the sole Holder and owner of the note, and parties holding book-entry interests in the notes (i.e., bondholders) either directly (as clearing system participants) or indirectly through participants would not be considered Holders;
   2. to exercise any rights of Holders under the indentures, indirect holders of book-entry interests would need to rely on the procedures of their participants, and those participants would in turn need to rely on the operating procedures of Euroclear and Clearstream.

To Deputy Judge Liu, those provisions made it clear that bondholders were not Holders and therefore could not could not pursue Tunghsu Group under the guarantee. Only if definitive notes were issued in accordance with the terms of the indenture would they become a Holder, but that hadn’t occurred. Beyond that scenario, it made no sense for beneficial holders of book entry interests to have an unrestricted right to sue the guarantor when even the rights of Holders to sue were limited under the standard no action clause set out in the indenture.

If that reasoning sounds familiar, it’s because it largely mirrors that of: (i) Justice Doyle of the Grand Court of the Cayman Islands in his April Shinsun Holdings decision; and (ii) Deputy Judge Suen of the Hong Kong High Court in the Leading Holdings decision, released only days before the Tunghsu decision. In those cases, the courts concluded (inter alia) that bondholders had no standing to present a winding-up petition either under the terms of the indenture (because only a Holder had such rights) or as a contingent creditor (because there was no pre-existing relationship between the beneficial holders and the issuer upon which a potential liability was based).

Interestingly though, Deputy Judge Liu didn’t seem to consider one of the key issues in Shinsun Holdings, Leading Holdings and the subsequent BVI decision in Haimen Zhongnan Investment Development, namely whether the Euroclear’s operating procedures – which contain a global authorization permitting bondholders to act as agent of the Holder under the terms of any bond indenture – had been incorporated by reference into the indenture (under New York law). That was a point the three other courts had disagreed on — the BVI court accepted that under New York law the Euroclear procedures had been incorporated, allowing bondholders to step into the shoes of a Holder and sue for payment; the Cayman and Hong Kong courts concluded they hadn’t, leaving bondholders reliant on the common depositary’s nominee taking such action for them, but without any ability to instruct it to do so.

Who cares what a New York court said about this New York indenture, this is Hong Kong

But the real surprise for bondholders was that the Hong Kong court refused to accept they could sue Tunghsu Group to enforce the guarantee contained in the indenture despite the New York court having already ruled that two of the bondholders could do so.

That’s right, when interpreting what rights a bondholder had under a New York law-governed indenture, Deputy Judge Liu was happy to ignore or discount the findings of the New York court that Tunghsu Group was liable to bondholders Zhang and Le under the very same indenture. The judge even dismissed the bondholders’ argument that expert evidence on New York law should be adduced, finding that the approaches of the New York court and Hong Kong court to interpreting the indenture would be essentially the same. Apparently not!

In fairness, the New York judgment was a default judgment, issued after Tunghsu chose not to defend the proceedings. In turn, that meant the New York court was not called upon to consider detailed argument as to whether or not the bondholders had standing to sue Tunghsu Group. But presumably the court still needed to be confident that the bondholders had standing to sue and that their claim had merit. For some reason, the Hong Kong court didn’t care.

Your other claims are also flawed

Finally, Deputy Judge Liu took aim at the bondholders’ claim against the directors, once again concluding that there was no serious issue to be tried.

In short, the judge concluded the claims were a long shot. If they had been raised under Hong Kong law, they would have fallen foul of the reflective loss principle which prevents shareholders and creditors recovering loss which was actually suffered by a company. In this case, the bondholders had essentially argued that the directors had wrongfully misappropriated Tunghsu’s assets or recklessly allowed Tunghsu to make the outbound cash flow in breach of their fiduciary duties, which left the company unable to pay the amounts due under the notes. That meant the loss suffered by the bondholders really only reflected the loss suffered by Tunghsu because of the alleged wrongful acts of the directors. And while it was PRC law, not Hong Kong law, which would determine whether the directors had in fact caused loss, the bondholders could not demonstrate that the reflective loss principle wouldn’t also defeat their claim under PRC law.

And just to rub salt into the wounds a little more, the judge also concluded that it was unclear whether Hong Kong was the most appropriate forum in which to hear the bondholders’ claims, given that they involved issues of PRC law (such as whether the reflective loss principle applied), all directors were ordinarily resident in the PRC, and the alleged wrongful acts of the directors (if true) were committed in the PRC. For that reason alone, the court would have refused to grant leave to serve the proceedings outside of Hong Kong.

To enforce in Hong Kong, bondholders must act in New York first

For Tunghsu’s bondholders, the path to enforcing their rights is now clear – push forward with having their New York judgment recognized in Hong Kong and then seek to enforce it against any assets in Hong Kong and/or by serving a statutory demand and winding-up petition against Tunghsu Group itself. Each step of that process will no doubt be opposed by Tunghsu, but may exert enough pressure to extract a better restructuring offer.

More broadly, Deputy Judge Liu’s decision once again highlights that bondholders will face a struggle to enforce their New York law-governed bonds in Hong Kong other than through their trustee. But it also illustrates the way around that quagmire. First, approach the New York courts and obtain a default judgment. Then, bypass any question as to whether or not you have standing to commence proceedings against an issuer or guarantor in Hong Kong by simply seeking recognition of your New York judgment. The path might be a little longer, but it seems that giving the Hong Kong courts less to think about is the best way forward.

[i] Another bondholder, Asia-focused hedge fund BFAM Asian Opportunities Master Fund LP, took a similar approach to enforce its rights in respect of the USD 100m of notes it held. On 24 July 2020, it commenced proceedings in New York against the issuer and guarantor for the principal and interest outstanding. Then, on 23 September 2020, it filed a motion seeking default judgment, which the court granted on 17 December 2020. Judgment was then entered for the sum due and owing on 16 February 2021.

Since filing its bankruptcy petition, Yellow Corporation has signaled that it intends to use Chapter 11 to sell its assets and wind down. In its first day bankruptcy hearing, the company’s counsel expressed optimism that they “don’t think the secured debt is the fulcrum” because an asset sale would more than satisfy all funded debt claims and there would be “material proceeds” for unsecured creditors. If the debtors are correct, the focus of the bankruptcy cases is likely to turn to recoveries for the debtors’ employees and its general unsecured creditors. This, in turn, raises questions as to how significant claim pools, such as Worker Adjustment and Retraining Notification (WARN) Act claims and claims arising from the debtors’ wage, benefit and pension obligations could impact recoveries for general unsecured creditors.

In this article, the first of a three-part series, the Debtwire legal analyst team provides an overview of Yellow’s run-up to bankruptcy, identifies some of the parties who might play major roles in the bankruptcy cases and discusses how the Chapter 11 cases might unfold. In later installments Debtwire will examine the WARN Act claims that have been asserted in several class action lawsuits, as well as pension and other employee-related claims. We will also discuss where those claims might sit in the distribution waterfall and how recoveries for unsecured creditors could be impacted.

Company background

Yellow is a less-than-truckload (LTL)[1] carrier based in Nashville, Tennessee. According to the first day declaration (First Day Declaration) of Yellow’s Chief Restructuring Officer, Matthew Doheny, the company was founded in the 1920s as a freight carrier. After a period of deregulation in the 1980s, the company expanded in the early 2000s by acquiring other carriers. Before entering bankruptcy, Yellow operated several trucking brands – Holland, New Penn, YRC Freight and Reddaway (Opcos). The company also has an independent, non-union operating subsidiary third-party logistics (3PL) solutions provider, Yellow Logistics (Logistics), which operates six warehouses and provides outsourced storage, transportation and fulfilment services. Yellow was the third largest LTL freight carrier in the country and generated more than USD 5.2bn in operating revenue in 2022, says Doheny in his declaration.

Source: First Day Declaration

According to Doheny, prior to its bankruptcy filing Yellow was the largest union carrier in the country. Doheny said that before the layoffs, on 27 July, the company employed nearly 30,000 people, approximately 22,000 of whom are members of the International Brotherhood of Teamsters (IBT). OpCos YRC Freight, USFHolland, and New Penn, are parties to a National Master Freight Agreement, which is a collective bargaining agreement (CBA) with several local teamsters unions (Local Unions) that expires on 31 March 2024.

Capital structure: the US Treasury comes to Yellow’s aide during the COVID-19 pandemic

Yellow has approximately USD 1.223bn in outstanding funded debt, including a private B-2 term loan, two government term loans and an asset-based loan (ABL) facility. The B-2 term loan is a USD 600m facility that was issued by Apollo Global Management, LLC (Apollo) as lead lender, with Alter Domus as administrative agent. As discussed below, it has been reported that the loan has recently been purchased by Citadel Credit Fund. It matures on 30 June 2024.

During the COVID-19 pandemic, in July 2020, Yellow received two Coronavirus Aid, Relief and Economic Security (CARES) Act secured loans from the US Treasury for a total of USD 700m (Treasury Loans). Yellow borrowed the funds in separate Tranche A and Tranche B loans of USD 300m and USD 400m, respectively. They mature on 30 September 2024. According to Yellow’s 2022 Form 10-K (2022 10-K) as part of the consideration for the Treasury Loans, Yellow issued 15,943,753 shares of common stock to the US Treasury, which upon issuance had a fair value of USD 46.7m and constituted approximately 29.6% of Yellow’s common stock on a fully diluted basis. In its bankruptcy petition, Yellow states that the US Treasury currently holds 30.6% of the company’s shares.

Yellow also has an ABL facility arranged by Citizens Bank, Merrill Lynch, Pierce, Fenner & Smith,and CIT Finance LLC (ABL Facility). Yellow and the OpCos are borrowers under the facility, which is guaranteed by other subsidiaries. It has a maturity date of 9 January 2026, with a springing maturity 30 days prior to the maturity of the Apollo Loan or the Treasury Loans.

Yellow’s capital structure as of the petition date is summarized below:

Yellow saw a steady decline in its stock price in the run-up to its bankruptcy filing. The company’s shares fell from USD 6.78 as of 17 August 2022 to as low as USD 0.57 as of closing on 27 July 2023 before climbing back to USD 2.48 per share on 7 August. As of 16 August, the shares had fallen back down to USD 1.10. In contrast, the pricing of the B-2 term loan has held relatively steady during the past couple of years, with a price of USD 91.63 on 16 July 2022 and USD 91.5 on 16 August 2023:

Source: Debtwire

The company’s pension plans

Yellow’s non-union and union employees participate in separate pension plans. The company states in its 2022 10-K that it sponsors three single-employer defined benefit pension plans for approximately 4,600 current and former non-union employees. The plans were closed to new participants as of January 2004 and benefit accruals were frozen as of July 2008. According to the 2022 10-K, as of 31 December 2022 the plan was underfunded by USD 97.6m. The company said that it expects cash contributions to be nominal for 2023 and the following years, “if required at all.”

According to the 2022 10-K, the company also contributes to several multi-employer pension plans for the 82% of its now former employees who are covered by CBAs, which determine the amount of the contributions. Those plans are not directly managed by the company and those assets and liabilities are not included in the company’s balance sheets. The multi-employer plans in which the debtors participated as of 31 December 2022 that the company labelled “individually significant” are the (i) Central States, Southeast and Southwest Areas Pension Fund (Central States Fund), (ii) the Teamsters National 401(k) Savings Plan, (iii) the Road Carriers Local 707 Pension Fund, and (iv) the Teamsters Local 641 Pension Fund. The debtors state in their 2022 10-K that the company contributed USD 111.5m to these plans in 2022, with USD 63m of that sum going to Central States and USD 21.7m to the Teamsters National 401(k) plan. In the 2022 10-K, the company notes that if it fails to make its required contributions to the plans it would be exposed to penalties, including withdrawal liabilities.

“One Yellow” and disputes with the International Brotherhood of Teamsters

Doheny says in his declaration that Yellow devised a plan called “One Yellow” that was aimed at integrating the operations of four of the company’s OpCo subsidiaries to eliminate inefficiencies and to create a super-regional company that would operate as “one company, one network, under one Yellow brand.” The company projected that the One Yellow project could result in up to USD 675m in additional annual revenue or 13.5% of the company’s revenue. According to Doheny, “the very survival of Yellow depended on completing One Yellow as soon as possible.”

Doheny also notes in the First Day Declaration that the company launched phase 1 of the One Yellow project in September 2022 and planned to implement phase 2, which contemplated a restructuring of 70% of the company’s network by the end of 2022. However, the company was prevented from implementing these changes by the IBT and the Local Unions, says Doheny. In a complaint filed in federal court in Kansas (IBT Litigation), the company alleges that the Local Unions breached the CBA by refusing to participate in change of operations hearings and by making any union approval of the operational changes contingent upon wage increases. The complaint further says that IBT, while not a party to the CBA, instigated, supported and ratified the unions’ breaches. Yellow seeks damages of USD 137m in lost savings and liquidity due to the delay in implementing the changes, and USD 1.5bn for loss of enterprise value due to the company’s liquidation. The unions and the IBT have filed a pending motion to dismiss in which they argue that the proposed changes violated the terms of CBA and “effectively gutt[ed]” it.

Yellow’s trouble with the unions was not limited to operational change disputes. On 18 July, the IBT announced that Yellow had failed to make a USD 50m contribution to the Central States Fund and that the latter’s board of trustees had voted to suspend health care benefits and halt pension accruals for Yellow employees, effective 23 July. On 19 July, the Central States Fund filed a complaint against Yellow and Opco Holland in the US District Court for the Northern District of Illinois seeking separate awards of approximately USD 4.3m in unpaid pension contributions, compelling the payment of future contributions and seeking to recover approximately USD 18.2m in unpaid health fund contributions.

In response to the failure to make payment, the IBT threatened a strike. Doheny says that the threatened strike caused the company’s individual shipments to drop from 40,000 to “near zero” over a four-day period. Although at the last minute IBT had Central States agree to defer the contributions for 30 days, thereby averting the strike, the action was “too little, too late” and the threatened strike had “sealed Yellow’s fate,” Doheny says.

According to the First Day Declaration, Yellow discontinued accepting new shipments the week of 24 July. In their first day motion to pay wages and employee benefits, the debtors state that by 2 August they had terminated all but 1,650 go forward employees who will help with the wind down. The company filed its bankruptcy petition on 6 August and is poised to continue these disputes in Chapter 11.

What could the Chapter 11 case look like?

DIP lending competitors

Given the factual complexities noted above, Yellow may not have a smooth trip through Chapter 11. One interesting development at the outset of the Chapter 11 cases has been the emergence of several parties who are vying to be DIP lender. The prepetition lenders led by Apollo originally offered a USD 142.5m debtor-in-possession (DIP) loan, which came with a USD 501.5m rollup of the prepetition B-2 term loan facility and a pricey 17% interest rate. It also set a short 90-day time frame for the sale of the company’s assets. However, on 15 August, it was reported that the Citadel Credit Fund purchased the loan after other bidders emerged on the scene who were willing to offer better DIP terms.

Prior to Yellow’s bankruptcy filing, hedge fund MFN Partners Management, LP (MFN) purchased 22,067,795 shares of the company’s common stock, representing 42.5% of the total common shares. At Yellow’s first day hearing it was revealed that MFN had offered to make a competing DIP loan, but at a cheaper interest rate and with a longer sale runway of 180 days. Originally proposed as a loan that would be pari passu with the DIP facility, MFN subsequently offered a junior loan. MFN’s interest in Yellow’s assets may be strategic as well as financial, given that it’s counsel, Dennis Dunne of Milbank, stated at the hearing that the fund also is the largest shareholder in Yellow’s former competitor, transportation logistics manager company XPO, Inc.

In addition, in what could be preparations for a possible credit bid, Patrick Nash of Kirkland & Ellis stated at the first day hearing on behalf of the debtors that a second party, LTL and truckload company Estes Express Lines, had offered a junior DIP loan.

Unsecured creditors’ committee

The DIP loan battle might hit more traffic now that the official committee of unsecured creditors (UCC) has been appointed. Yesterday, 16 August, the US Trustee announced that it had appointed a very large nine-member UCC, which may weigh in on the competing DIPs. But it’s not just the DIP loan that the UCC will weigh in on. Reflecting the importance to the bankruptcy cases of employee-related claims, the majority of the members on the UCC represent employee interests – the IBT, the Central States Fund, the New York State Teamsters Pension and Health Funds, the Pension Benefit Guaranty Corporation (PBGC) and a WARN Act class action plaintiff, meaning that the committee is likely to play an active role on the employee and pension issues noted above. The other four members of the UCC are trade creditors.

As will be discussed in later installments of this series, pension claims, and sometimes WARN Act claims, can be among the largest unsecured claims in a bankruptcy case. If Yellow or the PBGC terminate Yellow’s single-employer pension plans, the PBGC will be able to assert a claim for any underfunding of the plans. In addition, if the debtors withdraw from their multiemployer plans (such as the Central States Fund) they could face substantial withdrawal liability claims.

Sale of assets “free and clear” of pension and other liabilities

The complexities don’t end there for the UCC or the debtors. In a motion for a temporary restraining order (TRO) filed by Yellow in the IBT Litigation prior to the bankruptcy filing, the company warned that if it could not get TRO relief it would be “forced into a Chapter 7 liquidation.” However, Yellow subsequently changed course, and instead filed a Chapter 11 petition, together with a DIP motion seeking approval of a USD 142.5m DIP facility, as well as a motion to approve bid procedures to sell substantially all of its assets in one or more transactions. At Yellow’s first day hearing Nash emphasized that there is “no prospect of a going concern sale.” However, Doheny says in his declaration that if the company’s portfolio of real estate and equipment is sold at their appraised values, the proceeds “would exceed the aggregate amount of Yellow’s prepetition secured debt and the DIP facility.”

One business unit that may be particularly attractive to purchasers is the company’s Logistics subsidiary. Prior to the bankruptcy, on 28 July, Yellow issued a press release stating that it was “exploring options” and was in talks with “multiple prospective bidders” for the sale of Logistics, which the company said is one of the “fastest growing 3PLs in the industry.” Although Logistics’ employees are 100% non-union, it would still be liable for the pension obligations of each member of Yellow’s “controlled group,” which includes subsidiaries in which a parent corporation owns at least an 80% share, because it is a 100% owned subsidiary of Yellow.

A sale of some or all of Yellow’s assets pursuant to Bankruptcy Code section 363 could allow a purchaser to take them “free and clear” of all claims, including pension liabilities, with the company using the proceeds to pay creditors and wind down the debtors’ estates.[3] A debtor can sell assets free and clear of liens if the sale price is greater than the aggregate value of all liens on the property. In addition, a secured lender may credit bid its claim, that is it can offset its claim against the sale price.[4] 

Other potentially attractive assets are the company’s real estate and tractors/trailers. Yellow’s 2Q23 report states that as of 30 June the book value of the company’s property and equipment was approximately USD 1.14bn. Doheny states in the First Day Declaration that Yellow’s real estate portfolio is “substantial” and consists of “hundreds of owned and leased properties.” According to the company’s 2022 10-K, Yellow owned 166 of the 308 service facilities that it operates. Some of Yellow’s terminals have been sold for significant value. The company reported in its 2022 10-K that it sold one terminal in 4Q22 for approximately USD 31m. In 2Q23 the company closed on a sale of its terminal in Compton, California for USD 80m. In addition to real estate, the company has significant personal property assets. In its 2022 10-K, Yellow said that as of 31 December 2022 it owned approximately 11,700 tractors and approximately 34,800 trailers.

In their bidding procedures motion, the debtors proposed a bid deadline of 15 October and an auction deadline of 18 October. Those dates reflect the milestones in the now-defunct Apollo DIP proposal. It remains to be seen whether these deadlines will be modified by the party that becomes DIP lender. If the ultimate DIP lender intends to credit bid its loan, it is possible that they will want to keep the sale on the same tight time frame to maximize their chances of success at auction. Whatever the milestones, the debtors will have a lot of parties to contend with in any sale process including potential bidders, the UCC, lenders, other employee and pension representatives and the US Trustee, among others.

IBT Litigation to enhance recoveries

These parties will no doubt be evaluating the IBT Litigation as well as the case progresses. Indeed, another question here is whether Yellow will proceed with its litigation with the IBT and the Local Unions now that it has filed for bankruptcy. Although an award or settlement could meaningfully augment the bankruptcy estate and the funds available for distribution to creditors, the likelihood that Yellow will succeed is far from clear. The IBT has moved to dismiss the case, arguing that Yellow and the OpCos failed to exhaust mandatory grievance procedures under the CBA before filing the lawsuit and that plaintiff Yellow, which is not a party to the CBA, can’t sue to enforce it. The IBT also argues that the complaint should be dismissed because Yellow fails to allege that IBT actually violated the agreement. The uncertainty surrounding the litigation at this early stage in the case makes it difficult to value Yellow’s claims. If the case is not settled or litigated to conclusion prior to the confirmation of any Chapter 11 plan, the debtors could propose to create a litigation trust, funded with sale proceeds, that would prosecute the claims to conclusion.

Final thoughts

It will be interesting to see who wins the DIP bidding war and whether the loan will be a financial investment or a strategic loan that could be a predicate to a credit bid.  Today (17 August) at 1pm ET, Debtwire will live blog a hearing where Yellow will either seek approval of a consensual interim DIP financing proposal or hold a status conference to discuss ongoing DIP negotiations.

Ultimately, the choice of lender could influence bid terms such as the sale time frame and the amount of break-up fees. This, in turn, could impact the price that the debtors receive for their assets. And if the sales proceeds are sufficient to satisfy the secured debt claims, the debtors’ current and former employees and the pension funds will vie for the remaining proceeds. In the next two installments of this series, Debtwire will discuss the claims that those employees might bring and the relative priorities that those claims may have.

Corporations with funded debt that become financially distressed to the point that they commence restructuring or liquidation proceedings often require additional funding to see those proceedings through to completion. In this legal analyst quarterly report, the Debtwire legal analyst team discusses the various requirements for obtaining financing after the commencement of a liquidation or reorganization proceeding in the US, the UK, Latin America and Asia Pacific regions, exploring the various options available in each jurisdiction to incentivize lenders and highlighting recent examples of some of the tensions that can arise.

Global Legal Analyst Quarterly Report – DIP financing across the globe

Amyris Inc, a company that manufactures synthetic biological compounds used in a variety of consumer, pharmaceutical and food products, kicked off a bankruptcy case with the goal of restructuring its more than USD 1bn in funded debt while also pursuing a sale of an unprofitable consumer brands business segment.

Amyris filed for Chapter 11 protection on 9 August in the US Bankruptcy Court for the District of Delaware, reporting assets of USD 679.68m as of 31 March, when it submitted its most recent quarterly disclosure with the US Securities and Exchange Commission, against USD 1.33bn in total debts.

The company comes into the bankruptcy process with USD 190m in debtor-in-possession (DIP) financing lined up from Foris Ventures, an existing lender, and the goal of finding a buyer for its consumer brands business segment and refocus the company on its core business of developing synthetic biological compounds with a variety of applications, according to court documents.

A first day hearing has not yet been scheduled. Judge Thomas Horan has been assigned to oversee the Chapter 11 case.

DebtwireDockets: Amyris Inc

The company

Amyris bills itself as one of the world’s top manufacturers of ingredients made with eco-friendly synthetic biology, using a fermentation technology that has applications in flavors and fragrances, sweeteners, cosmetics, pharmaceuticals and other consumer products, according to a first day declaration from Han Kieftenbeld, the CFO and interim CEO of Amyris. The company

“Amyris has developed sustainable and scalable alternatives to these environmentally damaging processes by using microbes (primarily yeast) to transform simple, sustainably grown, plant-based sugars into ingredients that are used in everything from lifesaving vaccines to commonly used consumer products,” explained Kieftenbeld.

The company first started in 2003, when a foundation grant funded its efforts to create an ingredient used in anti-malaria treatments that was historically sourced from a plant that was in limited supply and subject to fluctuations in price. Amyris ultimately developed a semi-synthetic version of the substance, artemisinin, that now makes that anti-malaria treatment widely. At a high level, the company’s process involves genetic engineering of yeast strains that are then fermented in sugarcane syrup, according to the first day declaration.

Following the anti-malaria compound, the company used similar fermentation technology to put on the market 16 unique products. In addition to the core business of developing synthetic biological compounds, Amyris has also developed a line of “clean beauty brands” that it sells through direct-to-consumer online platforms and a network of retailers, including Sephora, Target and Walmart, said Kieftenbeld. Brands under the consumer products business segment include Biossance skincare products, Pipette baby skincare products, Purecane zero-calorie sweeteners, and 4U by Tia hair care products sold exclusively at Walmart.

Amyris has several facilities, including a headquarters, lab and pilot-scale production plant in Emeryville, California, as well as a 99% ownership interest in a commercial-scale production plant in Leland, North Carolina. The company and certain non-debtor subsidiaries also have operations in Brazil.

As of its Chapter 11 petition date, Amyris had 708 employees, with 557 working on an annual salary basis and 151 working on an hourly basis. Kieftenbeld said that on 26 June and 7 August of this year, the company announced reductions in force that trimmed the workforce by about 30%.

The debt

Amyris comes into the Chapter 11 case with USD 1.06bn in secured and unsecured funded debt. On the secured side, the company owes USD 295m on prepetition loans from its now-DIP lender Foris, and USD 74m on a prepetition loan from DSM Finance BV.

On the unsecured side, the company’s single largest creditor is US Bank NA as trustee for Amyris’s USD 690m in 1.5% convertible unsecured notes due 2026. The next largest unsecured claim comes from Cosan US LLC and relates to a settlement agreement, according to bankruptcy court documents. Kieftenbeld pegged the company’s overall unsecured trade debt at about USD 95m.

The descent

Kieftenbeld lays blame for Amyris’s financial strains on several factors, including that the company has always operated at a loss and required a continuing stream of equity and debt financing. During the past two years, the company’s total revenues have dropped by more than 20%—Amyris posted USD 341.8m in revenue in 2021, before a drop to USD 269.8m in 2022.

To try to address some of the strain, Amyris in 2022 implemented a restructuring strategy that it dubbed “fit-to-win,” which involved price hikes on targeted products, along with efforts to reduce production, shipping and other costs. In April 2023, the company brought in PricewaterhouseCoopers’ business recovery services unit to try to accelerate the turnaround strategy.

“These efforts have yielded mixed results,” said Kieftenbeld, before noting that in the first quarter of 2023, Amyris posted a year-over-year decline of 3% in revenues. The interim CEO also noted that two of the company’s major business segments—technology access and consumer products—still “continue to incur significant losses.” Each of the company’s consumer brands generate losses, while Kieftenbeld attributed unfavorable economic provisions in certain contracts.

As its troubles wore on, Amyris developed a strategy to refocus its business away from the consumer brands segment, shutting some of the brands down and, in July, hiring Intrepid Investment Bankers to market the company’s consumer brands for sale.

The company also reached agreements in recent months with its secured lenders that addressed existing defaults and provided Amyris with new loans from Foris and some of its affiliates. Amyris has also engaged with a group of convertible noteholders that have organized “in an effort to work cooperatively towards a consensual restructuring,” said Kieftenbeld.

The DIP and Chapter 11 case

Now under Chapter 11 protection, Kieftenbeld said the company will continue to market its consumer brands for sale and attempt to reposition the Amyris business on its historical core competencies—research, development and commercialization of sustainable biological compounds.

To fund itself during the bankruptcy, Amyris secured a commitment from Foris for USD 190m in DIP financing. Under milestone provisions built into the DIP, the company intends to use the first 35 days of its Chapter 11 case to try to negotiate with its key financial stakeholders for a consensual plan of reorganization that would streamline its balance sheet while allowing the continued pursuit of a buyer for the consumer brands division.

If no such comprehensive restructuring deal emerges, however, the company’s DIP calls for a toggle to a sale of substantially all of Amyris’s assets.

The advisors

Banco Santander has just obtained a favorable decision in a credit enforcement suit filed against Light SA last week, which has the potential to shake up the bankruptcy case and derail the company’s efforts to restructure its claims via a judicial recovery process, despite explicit prohibitions under Brazilian law. If the strategy adopted by the bank to collect on claims allegedly impaired by the controversial restructuring process ultimately succeeds, other creditors could be incentivized to do the same – thereby threatening the implementation of the in-court restructuring process.

Source: Debtwire’s Restructuring Database

Background – the controversial bankruptcy

The Light SA case has been contentious since the very beginning, when the Brazilian electricity provider obtained an injunction preventing financial creditors from commencing or continuing with individual lawsuits, in a pre-insolvency proceeding commenced in April 2023 with a Rio de Janeiro corporate court. The injunction protected both the parent company and its subsidiaries (i) Light Servicos de Eletricidade S.A. (SESA) and Light Energia S.A., despite the fact that these subsidiaries are explicitly prevented by the law from commencing debt reorganization proceedings (arguably including the pre-insolvency filing), as they hold concession agreements with the government.

Source: Debtwire’s Restructuring Database

The protective injunction issued in favor of the group was later confirmed by the court, when the Light group filed for judicial recovery on behalf of only the holdco, and requested the extension of the stay period protection for its subsidiaries that operate concessions. The request was granted by the court, which rejected all the objections filed by Santander and other creditors which have been litigating with the company since the beginning of the pre-insolvency proceeding.

Source: Debtwire’s Restructuring Database

Circumventing protective measures

After these efforts failed to yield the hoped-for results, Banco Santander modified its approach to the case. In the decision that admitted the bankruptcy case for review, the court noted that, as Light SESA and Light Energia did not file for bankruptcy, the protection to them should apply only to the financial obligations linked to the concessionaires that have the holding company as co-obligator. As a result, the other obligations not connected to the filing entity could be enforced by creditors, including those related to consumption, suppliers, labor claims and indemnities.

Relying on this portion of the bankruptcy court decision, on 20 July, Banco Santander sent Light an official letter stating that it decided to forgo the guarantee provided by Light SA for the BRL 58.4m swap contract the bank reached with Light Energia. On the same day, Santander filed the credit enforcement petition, arguing that, as a consequence of the release of the guarantee, the debt was no longer linked to the parent company. Therefore, according to the bank, it was no longer impaired by the bankruptcy process, which means that it could be enforced. The lawsuit was filed with a Sao Paulo Civil court, which is the venue provided for in the swap contract to resolve disputes between the parties.

Light responded to the petition by accusing Santander of being opportunist and acting in bad faith, arguing that it was trying to circumvent the effects of the protective decisions issued in favor of the company. The rulings issued by the bankruptcy court, according to Light, were in line with the principle of company preservation set forth in Section 47 of Brazilian bankruptcy law and may not be violated by an individual execution measure commenced by a creditor against the collective restructuring procedure.

Enforcement suit admitted – potential domino effect puts judicial recovery at risk

In a decision issued on 26 July, Judge Clarissa Rodrigues Alves, of the Fourth Civil Court of the Sao Paulo Central Forum admitted the case filed by Santander and ordered Light to provide the payment of the debt and related expenses within the three days following official notification. Alternatively, Light may respond to the enforcement suit by filing a motion to stay execution (“embargos a execucao”) within 15 days following the official notification. Another option is to provide the payment of 30% of the debt by the same deadline and split the payment of the remaining claims in six monthly instalments, according to the decision.

The ruling in favor of Santander will likely incentivize the other financial creditors impaired by Light’s judicial recovery to seek similar individual decisions in the following days. Additionally, we expect that not only a response, but also several appeals and “conflict of authority” proceedings will be lodged by creditors, and the company as well, along with injunction requests, increasing litigation as usually occurs in unprecedented situations like this in Brazil.

After all disputes are ultimately decided by the courts, it seems that a definitive ruling in favor of the creditors could put the success of Light’s judicial recovery at risk.