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Celadon, Biggest Bankruptcy In Truckload History Expected By Mid-Week

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Celadon Group (OTC: CGIP) will file for bankruptcy protection under Chapter 11 no later than Wednesday, December 11, according to internal sources. The Indianapolis-based, publicly-traded trucking carrier employed more than 3,200 drivers and took in more than $1 billion in gross revenue as recently as 2015.

More recent numbers are difficult to come by because Celadon had to restate its financial reporting after mismanagement and a complex accounting scandal that ultimately resulted in former executives being indicted on securities fraud charges yesterday, December 5.

But the imminent bankruptcy's immediate cause was a technical default on Celadon's covenants, the agreements between borrowers and lenders that can define requirements for cash reserves and earnings. Celadon entered the week with scant cash in its accounts to continue operations, but was negotiating with creditors Luminis and Bluetorch to secure further financing. Those talks fell through Thursday morning, December 4, when Bluetorch declined to collateralize an infusion of additional capital by Luminis.

Over-the-road drivers may be at risk of being stranded — our source could not verify that Celadon's drivers would get home — and should fill their tanks at the earliest opportunity as the company's fuel cards still work. Celadon's 3,500 employees could lose their jobs soon.

Top customers of the company have been notified, in an effort by management to mitigate freight being stranded after a filling. Celadon handles significant volumes of critical automotive freight and told its customers that it did not want their plants to shut down. Sources not associated with the company have also told FreightWaves that FedEx Corporation (NYSE: FDX) has stopped loading Celadon branded trailers.

Celadon will be the largest truckload carrier to file bankruptcy in history. The North-South truckload carrier has 2600 trucks, including 2000 in the United States, 360 in Canada, and 335 in Mexico. The company is a dominant carrier on the I-35 corridor, running freight from Laredo to the Midwest, with a large concentration in the automotive sector.

The company's bankruptcy and likely shutdown will leave some capacity exiting the market at a time when the truckload market is struggling from over capacity. Large enterprise carriers running similar networks to Celadon will find new lane opportunities and a pool of high quality drivers. CFI, apart of Transforce (TSX: TFII), is Celadon's largest north-south competitor. PAM (NASDAQ: PTSI) is also likely to benefit, having deep exposure to the automotive sector and a large cross-border presence. Third-party logistics providers specializing in cross-border freight like Forager Logistics should also benefit from a sudden removal of NAFTA capacity.

Celadon was founded in 1986 by Stephen Russell and Leonard Bennett with 50 leased tractors and 100 trailers — its first contract was hauling automotive parts to a new Chrysler plant in Mexico. The company expanded rapidly into a true North American transportation company, offering dedicated, expedited, long-haul, local, and refrigerated transportation services. At its peak, Celadon operated 11,000 assets.

Russell was a native of New York City and earned a bachelor's degree and MBA from Cornell University. A collector of Andy Warhol's work and a lover of the arts, Russell named his trucking company after a style of ancient Chinese pottery; tellingly, ‘Celadon' is one of the very few words that are the same in both English and Spanish.

Celadon came to public markets through an initial public offering in 1994 and was listed on the New York Stock Exchange in 2009.

Russell stepped down from the CEO role in 2012; Paul Will succeeded him. Following the onset of illness, Stephen Russell resigned from Celadon's board in December 2015 and passed away the next spring.

Erik Meek and Bobby Peavler, both of whom were indicted on Thursday, were Celadon officers after the Russell era. Meek, the former chief operating officer, and Peavler, the former chief financial officer, are accused of orchestrating a scheme to exaggerate the value of some of Celadon's trucks, which should have been sharply depreciated.

A short seller's report that was published on the stock research and commentary site Seeking Alpha on April 5, 2017, "Celadon Group: A Story That Ends At Chapter 11," crashed the stock. The report outlined the accounting shenanigans that Meek and Peavler had been responsible for. A month later, the company's auditor, BKD, pulled out of the company.

Celadon announced it would have to restate some recent financial reporting; the stock plummeted. That July, new management was brought in: Paul Svindland, from XPO and EZE Trucking, was brought in as CEO. Thom Albrecht, who had worked in transportation equity research at Stephens and BBT before serving the industry as a consultant, joined Celadon as the chief financial officer.

It was Svindland and Albrecht's task to turn around a large truckload carrier whose financial records were completely uncertain. The new management team set to work reassuring investors and creditors, identifying problems and divesting assets. The larger deals were reported in 8-K filings, but many more were too small to require public notice; much of the proceeds went to pay creditors.

Ultimately Svindland and Albrecht had a very narrow margin of error in which to operate the company and achieve profitability; the precipitous collapse of trucking rates in the fourth quarter of 2018 could not have helped. At this time we do not know the impact of the General Motors strike on Celadon's revenue, but that 40-day long shutdown was certainly detrimental.

This is a developing story. FreightWaves will continue to provide updates as we get more information.

Image by Jeff Chabot from Pixabay


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