Celadon Group (OTC: CGIP) will file for Chapter 11 bankruptcy no later than Wednesday, Dec. 11, according to inside sources. The Indianapolis-based publicly listed truck carrier employed more than 3,200 drivers and made more than $1 billion in gross revenue as recently as 2015.
More recent figures are hard to come by as Celadon had to restate its financial disclosures after mismanagement and a complex accounting scandal that ultimately led to former executives being indicted for securities fraud yesterday, December 5.
But the immediate cause of the looming bankruptcy was a technical default on Celadon’s covenants, agreements between borrowers and lenders that can set requirements for cash and income reserves. Celadon entered the week with little cash in its accounts to continue operations, but was negotiating with creditors Luminus and Blue Torch for additional funding. These talks fell through until Thursday morning, December 5, when talks between Blue Torch and Luminus broke down over collateral issues. Blue Torch owned 70% of the debt and Luminus owned 30%.
Truck drivers are at risk of being stranded – our source could not verify that Celadon drivers will be returning home – and should fill up their tanks as soon as possible as the company’s fuel cards are still working. Celadon’s 3,500 employees could soon lose their jobs.
Many of the company’s high-profile customers have been notified, as part of management’s effort to alleviate freight holdup after a filing. Celadon handles large volumes of critical auto freight and has told customers it does not want their factories to close. Sources not associated with the company also told FreightWaves that FedEx (NYSE: FDX) has stopped loading Celadon brand trailers.
Celadon will be the largest truckload carrier in history to file for bankruptcy. The north-south truckload carrier has 2,695 trucks, including 2,000 in the United States, 360 in Canada and 335 in Mexico. The company is a dominant carrier on the Interstate 35 corridor, carrying freight from Laredo, Texas, to the Midwest, with a heavy concentration in the automotive sector.
The bankruptcy and likely closure of the business will cause some capacity to exit the market at a time when the truckload market is struggling with overcapacity. Large transport companies operating networks similar to Celadon will find new lane opportunities and a pool of high-quality drivers. CFI, a subsidiary of Transforce (TSX: TFII), is Celadon’s main north-south competitor. MAP (NASDAQ: PTSI) is also likely to benefit, due to its high exposure to the automotive sector and its strong cross-border presence. Third-party logistics providers specializing in cross-border freight like Forager Logistics are also set to benefit from a sudden NAFTA capacity cut.
Celadon was founded in 1985 by Stephen Russell and Leonard Bennett with 50 leased tractors and 100 trailers. Its first contract was to transport auto parts to a new Chrysler plant in Mexico. The company quickly grew to become a true North American transportation company, offering dedicated, expedited, long haul, local and refrigerated transportation services. At its peak, Celadon operated 4,000 trucks, while the company’s rental division, Quality Equipment, had 11,000 trucks.
Russell was originally from New York and earned a bachelor’s degree and MBA from Cornell University. A collector of Andy Warhol works and a lover of the arts, Russell named his trucking business after a style of ancient Chinese pottery. tellingly, “Celadon” is one of the few words that are the same in 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 as CEO in 2012; Paul Will succeeds him. Following the onset of illness, Stephen Russell resigned from Celadon’s board of directors in December 2015 and died the following spring.
Erik Meek and Bobby Peavler, both charged 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 certain Celadon trucks, which should have been heavily written down.
A short seller report that was published on the stock research and commentary site Looking for Alpha on April 5, 2017, “Celadon Group: A Story That Ends in Chapter 11”, crashed the stock. The report described accounting shenanigans that Meek and Peavler were allegedly responsible for. A month later, the company’s auditor, BKD, withdrew from the company.
Later, Celadon announced that it would have to rephrase some recent financial reports, and the stock fell again. In July, new management was put in place: Paul Svindland, of XPO and EZE Trucking, became CEO. Thom Albrecht, who had worked in equity research in transportation at Stephens and BBT before serving the industry as a consultant, joined Celadon as 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 got to work reassuring investors and creditors, identifying problems and disposing of assets. The largest transactions were reported in 8-K filings, but many others were too small to require public notice; much of the proceeds was used to pay creditors.
Ultimately, Svindland and Albrecht had a very narrow margin for error in operating the business and achieving profitability; the precipitous collapse of trucking rates in the fourth quarter of 2018 could not have helped. At this time, the impact of the General Motors strike on Celadon’s revenue is unclear, but this 40-day shutdown was certainly detrimental.
This is a developing story. FreightWaves will continue to provide updates as we have more information.
Sign up today for the Future of Supply Chain #FOSC22
Leading supply chain voices will travel to Rogers, Arkansas, May 9-10.
*Limited time pricing available.