As expected, trucking company Yellow (NASDAQ:YELL) has filed for bankruptcy under Chapter 11 of the federal bankruptcy code.
The company ceased operations a week ago, but its demise briefly made it a short squeeze “meme stock.” YELL stock fell 38% over the weekend.
Recently, I have been calling these late-life short squeezes “supernovas.” That’s because they result in an upward explosion of value that quickly fades to nothing. Yellow fits this pattern.
YELL Stock: The Pandemic Debt
In its Delaware bankruptcy filing, Yellow estimated assets of $2.15 billion and liabilities of $2.59 billion.
The final blow to Yellow was a $700 million loan it obtained in 2020 as part of former President Donald Trump and his administration’s pandemic relief plan. At the time, Yellow was called YRC Worldwide. The government took a 30% equity stake in the company when it made the loan.
Over the last three years, Yellow has paid $66 million in interest on the loan but has been unable to pay down principal. Yellow now says it will sell off its assets in bankruptcy but still intends to repay the loan in full.
As the company laid off its 30,000 workers and prepared for bankruptcy, however, hedge fund and primary creditor Apollo Global came in with a loan that put it ahead of the government among Yellow’s creditors. Apollo’s debtor-in-possession (DIP) loan should let it handle the liquidation.
MFN Partners helped the meme traders fuel a brief rally, buying 42% of the common to protect its interests in rival trucking stocks XPO (NYSE:XPO) and RXO (NYSE:RXO). Yellow opened trading today much closer to the price that YELL stock traded at when it first ceased operations.
What Happens Next?
Hedge fund manager Dan Loeb recently bemoaned the meme traders squeezing shorts in failing companies as Yellow went under. However, he also said he would “reduce […] single name short exposure in favor of market hedges and short baskets.”
This may mean that the “supernovas” will become smaller, while the shorts will always be with us.
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On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
