In a largely uncontentious commission hearing Thursday over the national security loan program, Treasury Secretary Steven Mnuchin acknowledged the $700 million loan made to less-than-truckload carrier YRC Worldwide (NASDAQ: YRCW) was “risky” and one that he would have not made.
Facing questions from the oversight commission tasked with monitoring the distribution of federal loans established under the Coronavirus Aid, Relief and Economic Security (CARES) Act, Mnuchin said he was encouraged by members of Congress to take losses on the loans as the program’s intent was to address an immediate liquidity crisis. He said some of the lending programs afforded under the act were done with the analysis that they would lose money.
Referring to his former banking and lending days, Mnuchin said, “If my bank had been underwriting this loan, we would not have made this loan.”
National security designation
The point of the hearing was to examine loans to “businesses critical to maintaining national security,” a subtitle in the legislation that allotted $17 billion in federal money for companies fitting the designation. Mnuchin said he collaborated with the Department of Defense to establish the criteria for such companies, but it was ultimately former Defense Secretary Mark Esper who recommended and certified YRC met the standard.
In prior oversight reports, the commission has called into question YRC’s designation as such a company. YRC provides 68% of the Defense Department’s LTL services hauling food, electronics and other supplies domestically for the military, a task commission members have suggested could be done by other carriers.
Mnuchin referred the commission to the Defense Department for further clarity on the designation as it made the decision.
The Defense Department was also invited to testify at the hearing, but stated it was unable to attend. The commission plans to hold a separate hearing for the Defense Department at a future date, but noted that the department is “currently resisting making public” a transcript from the upcoming hearing.
Concerns with underwriting guidelines for YRC loan
Sen. Pat Toomey, R-Pa., questioned some of the underwriting standards, noting five of the companies receiving loans lost money in the year prior to the decision, two were startups and some received more in loans than they made in revenue.
Mnuchin said that the underwriting criteria established by Treasury was sufficient, noting that of the 74 applicants under the subtitle, only 11 were approved. He said Treasury had a hard time distinguishing between COVID-related impairments to a business’ 2020 expectations versus something that could be more structural in nature.
On YRC, Rep. French Hill, R-Ark., questioned the collateral on the loan and whether it protected taxpayers. He said the company was allowed to borrow on its accounts receivable and the valuation of its real estate at 100 cents on a dollar. He also wondered if the value of the YRC fleet was reasonable given its age. Hill pegged total collateral pledged on the loan at roughly $1.1 billion, not the $1.6 billion that Treasury previously claimed.
Hill continued questioning the rationale of making such a large loan to a company “rated speculatively” for the past 20 years and one that has been “hanging on by a thread since the global financial crisis.”
“The only way YRC has survived for the last 10 years is through bailouts by the government and the private equity industry,” Hill continued. He contended YRC is “staying afloat by providing the cheapest pricing,” stating that investment research shows the company charges about 18 cents per pound versus the average of its competitors, which is in the mid-20 cent range.
Mnuchin said that the loan was undertaken with the added risk in mind and believes the collateral provided was adequate, pointing to the 30% equity position Treasury received from YRC as part of the loan agreement. That stock is now worth $100 million as the company’s shares have tripled since the loan announcement.
Mnuchin acknowledged the rebound in the economy and at YRC has been “fortunate.”
YRC’s ties to the White House
Bharat Ramamurti, an attorney tasked with serving on the commission, asked Mnuchin if he had been contacted by President Trump’s senior adviser and son-in-law, Jared Kushner, regarding the YRC loan. He asserted Kushner has “close ties” to Apollo Global Management (NYSE: APO), which provided YRC with a $600 million term loan in September.
Mnuchin said no one from Kushner’s staff had reached out to him. Mnuchin acknowledged the loan was risky but that it was not a bailout of private equity. He said Treasury was tasked with moving very fast in uncertain and tough times and that many lawmakers spoke up on YRC’s behalf, noting a loan to the company would save many union jobs.
Ramamurti asked Mnuchin if anyone from the White House had contacted him regarding the loan. Mnuchin said he would turn over any correspondence with the White House to the commission.
YRC CEO Darren Hawkins was named to the president’s Great American Economic Revival task force in April and former YRC Chairman and CEO Bill Zollars was appointed by the president and confirmed by the Senate to the U.S. Postal Service board of governors in June.
Hindsight on the loan program and next steps
Asked what he would have done differently, Mnuchin said, “I would use the same criteria” all over again. He said he could have made up to $5 trillion in loans in total, but believes Treasury’s underwriting decisions were prudent and saved many jobs. He acknowledged many complaints around the handling of the distribution, with some saying he took on too much risk for loss and others saying he didn’t take on enough.
Mnuchin said he would advise the next Treasury secretary to sell the YRC loan and liquidate the equity position. He sees a “significant profit” to taxpayers in doing so. He also said Treasury doesn’t want to be in the long-term business of making these types of loans.
Mnuchin advised the Pentagon to look at all its vendors and spread the risk over multiple vendors when possible.
The office of the director of National Intelligence responded that it would not attend Thursday’s hearing. However, it told the commission that it hasn’t designated any company critical to national security and didn’t give any input in the Defense Department’s designations.
