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August 6, 2019 − Jack Cooper Ventures, Inc. and 18 affiliated Debtors (“Jack Cooper” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Georgia, lead case number 19-62393. The Debtors, a specialty transportation and logistics provider and one of the largest over-the-road finished vehicle logistics companies in North America, are represented by Brian S. Hermann of Paul, Weiss, Rifkind, Wharton & Garrison. Further board-authorized engagements include (i) King & Spalding as bankruptcy co-counsel, (ii) Houlihan Lokey as investment banker, (iii) AlixPartners LLP as restructuring adviser and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bnn. Documents filed with the Court list the Debtors’ six largest unsecured creditors, each with an unliquidated claim, as pension funds; and herein lies the Debtors' most pressing problem: It can't afford the more than $30.0mn annual tab to service its pension plans in an increasingly competitive (and non-unionized sector) nor can it contemplate the estimated $2.0bn liability it would incur if it withdrew from those plans.
In a press release announcing the Chapter 11 filing, Jack Cooper advised that “it is undertaking a comprehensive, court-supervised restructuring that would reduce its debt by more than $300 million and preserve jobs for nearly 2,000 union workers.
In connection with this restructuring, the Company and the Teamsters National Automobile Transporters Industry Negotiating Committee (‘TNATINC’) have negotiated modifications to the collective bargaining agreement (‘CBA’) that will be presented to the bargaining unit members for ratification. These modifications will help ensure Jack Cooper’s financial viability and avoid any reduction in employee wages or healthcare benefits.
Under the restructuring, the Company’s largest lenders have agreed to cancel their debt as part of a transaction to purchase all or substantially all of the Company’s assets. The purchase will be subject to a court-approved competitive bidding process….The Company’s lenders also have agreed to provide essential debtor-in-possession financing to the Company that will allow it to maintain normal operations and pay employees and suppliers in the ordinary course of business."
Chapter 11 Objectives
The Debtors commenced these Chapter 11 Cases to "pursue a restructuring process and consummate a value maximizing sale of their business to the highest or otherwise best bidder."
Restructuring Support Agreement
The Debtors have entered into a restructuring suppprt agreement (the "Restructuring Support Agreement" or "RSA"), dated as of August 6, 2019, with their First Lien Term Loan Lenders and Junior Term Loan Lenders further to which the stalking horse bidder (an investment vehicle created by creditor Solus Alternative Asset Management (“Solus”)) will credit bid for the Debtors' assets using amounts owed it under the Debtors’ Junior Term Loan Facilities and Term DIP Facility (the "Sale Transaction"). The RSA also contemplates that the Junior Term Loan Lenders will provide a new money junior secured $15.0mn multi-draw term loan debtor-in-possession (“DIP”) financing facility (the “Term DIP Facility”) that will be credit bid in connection with the Sale Transaction. In addition, Wells Fargo will provide a senior secured superpriority asset based revolving lending facility with commitments of up to $85 million (the “ABL DIP Facility” and, together with the Term DIP Facility, the “DIP Facilities”).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “May Declaration”), Greg May, the Debtors' Chief Financial Officer, detailed the events leading to Jack Cooper's Chapter 11 filing; largely (i) an inability to compete with non-unionized peer companies (in respect of which they have a 10-30% cost disadvantage), (ii) the decline of the US auto industry (historically providing the Debtors' strongest client relationships), (iii) the difficulty of competing with lower-cost railway competitors, (iv) increased upkeep costs in respect of an aging fleet (the result of the liquidity-starved Debtors need to defer necessary capital expenditures) and (v) significant revenue-reducing developments in respect of their three largest custoners: Toyota, Ford and GM.
Special attention, however is saved for the crushing burden of being a unionized shop (the only other being Cassens Transport Company). The May Declaration states: "In total, the Debtors contributed $32.6 million and $34.3 million to multiemployer pension plans for the years ended December 31, 2018 and 2017, respectively. These contribution levels are not sustainable in light of the Debtors’ declining revenues and the Debtors’ need to obtain new capital to revitalize their fleet and sustain their operations in the current environment. The Debtors’ unsustainable labor costs have made it impossible for the Debtors to compete with the increasing number of lower-cost, non-unionized companies that have entered the carhaul industry over the past few decades. "
The May Declaration continues: "In recent years, the Debtors have faced declining revenues and loss of market share amidst a changing landscape for the carhaul industry nationwide. Moreover, as one of only two unionized carhaul providers in the United States, the Debtors are burdened with substantial labor costs, including pension obligations and work rules that limit the Debtors’ ability to respond to customer requirements, making it difficult for them to compete with non-unionized competitors. These challenges have caused the Debtors to face rapidly declining liquidity.
In the 1980s, trucking deregulation reforms enacted by the federal government paved the way for low-cost, non-unionized competitors to enter the carhaul industry. Additionally, railway companies have captured considerable market share of the “long-haul” segment due to significant cost advantages. These industry shifts facing the unionized carhaul companies have been compounded by the decreasing market share of the 'big three' Detroit-based automobile manufacturers (GM, Ford, and Chrysler), which historically maintained strong relationships with the unionized carriers (and Jack Cooper in particular). Combined with the general decline in private-sector unionization, these exogenous forces have dramatically reduced the number of unionized carriers in the fixed vehicle logistics industry from 40 in 1985 to just two in 2019—Cassens and Jack Cooper.
Most of the Debtors’ competitors do not have a unionized workforce, and the aggregate rig count of non-unionized carriers is almost double that of the two remaining unionized carriers. Competing carriers with non-unionized workforces have both (a) forced the Debtors to cut pricing to compete and (b) otherwise taken business from the Debtors, as the Debtors operate at a 10% to 30% cost disadvantage relative to their non-union competitors.
Since 2016, the Company’s revenues have sharply declined year over year, both as a result of its cost structure and overall industry dynamics. From 2016 to 2018, Jack Cooper Transport Company, Inc.’s, the Company’s primary carhaul business, revenue declined by 12.3%, from $612.5 million to $537.3 million, and the unit volumes it shipped declined by 16.9% primarily due to business lost to non-union competitors. The Company expects further revenue and unit volume declines in 2019.
More particularly, unit volumes shipped by the Company for Toyota, which was previously the Company’s third largest customer, declined by approximately 80% between 2016 and 2018 as Toyota moved substantially all of its business to lower-cost non-union competitors, due, in part, to the risks attendant to the Company’s overleverage. The remaining volumes the Company ships for Toyota are at risk of being lost when the Debtors’ contract with Toyota expires in 2022.
Similarly, GM, the Company’s largest customer, which comprised 48% of its revenue in 2018, received a 5% price concession under a new three-year contract executed in 2019 that provides for no annual price increases, and Ford, the Company’s second largest customer, received a 1% price concession in 2019. GM, in response to a letter from James P. Hoffa, the President of the International Brotherhood of Teamsters, explained its decision to re-source a substantial portion of its Jack Cooper business as required by the Company’s ‘uncompetitiveness’ and inability to ‘eliminate the gap’ with non-unionized carriers.
The Company’s declining performance has also been exacerbated by increasing repair and maintenance costs, as much-needed capital expenditures on its aging rig fleet have been deferred. The Company operates a truck fleet with an average age of over 14 years, and limited remaining useful life based on historical data and performance, and has lacked the financial wherewithal to invest in new equipment and major fleet refurbishments. As a result, from 2016 to 2018, repair and maintenance costs have increased by 19%. 36.The Company’s overall viability is also linked to that of the automobile industry generally, which has experienced flat to declining demand for new automobiles.
With numerous existing defaults, debt service obligations to the Prepetition Secured Parties of approximately $13 million within the next six (6) months, complete reliance on the Revolving Credit Facility to fund day-to-day operations, and no ability to obtain bridge financing or otherwise refinance any of the Prepetition Secured Facilities, the Debtors do not have the ability to continue operating as a going concern absent chapter 11 relief."
About the Debtors
Jack Cooper is a specialty transportation and other logistics provider and one of the largest over-the-road finished vehicle logistics companies in North America. The Company provides premium asset-heavy and asset-light based solutions to the global new and previously-owned vehicle markets, specializing in finished vehicle transportation and other logistics services for major automotive original equipment manufacturers and for fleet ownership companies, remarketers, dealers and auctions.
The Debtors’ businesses are divided into two segments: a transport segment (the “Transport Segment”) and a diversified, asset-light logistics segment (the “Logistics Segment”).
The Transport Segment delivers finished vehicles from manufacturing plants, vehicle distribution centers, seaports, and railheads to new vehicle dealerships. The Debtors operate a fleet of over 1,600 active rigs and a network of 39 terminals across the United States and Canada to haul primarily new vehicles, including two-door automobiles, light trucks, sport utility vehicles, and transit vans. The Debtors’ three largest customers, GM, Ford and Toyota, collectively account for the vast majority of total revenues. In 2018, the Debtors transported over 2.5 million finished vehicles and generated operating revenue of $540.7 million relating to the Transport Segment.
The Debtors’ Logistics Segment provides a wide range of asset-light services to the previously-owned vehicle market, including vehicle inspections, automated claims management, title and key storage services, brokerage and export services, export processing, third-party logistics management, and other technical services. The Debtors also help their customers move vehicles to and from dealerships, inspection lots, and auctions by coordinating transportation by third-party trucking or rail providers. The Logistics Segment’s customers include fleet ownership companies, remarketers, dealers, auctioneers, and relocation-management companies. For the year ended December 31, 2018, the Logistics Segment generated operating revenues of approximately $55.9 million.
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