The debt ratings of YRCW have been confirmed and in one case upgraded following the announcement that it is getting a $700 million cash infusion from the Department of the Treasury.
The Moody’s action taken Wednesday occurred on the same day that YRCW disclosed its plans for restructuring some of its debt with the proceeds from the Treasury support. The Treasury Department is acquiring almost 30% of the company as the method for putting the $700 million into the troubled LTL carrier.
The action completes a process that was started by Moody’s late last year to determine whether YRCW’s debt should be downgraded. Coming out of the process with an affirmation will be considered a victory.
The company’s corporate family rating (CFR) was affirmed at Caa1. While this is several steps up from the bottom rung at Moody’s, it still is described by the ratings agency as representing a company “of poor standing and a very high credit risk.”
Of the $700 million in new funding, YRCW has said that $400 million of it is going to equipment. “The $400 million of CARES Act funding earmarked for capital investments will expedite the replacement of aging tractors and trailers, yielding considerable cost savings through better fuel economy and lower maintenance and repair expenses,” Moody’s said in its report. “Earnings growth is also likely supported by the greater operational flexibility under last year’s labor contract with the International Brotherhood of Teamsters and the company’s ongoing network optimization strategy.”
But the Moody’s report also noted that margins of 2.5% to 5%, based on Moody’s own calculations, are “typically very modest.”
The other $300 million will be used for several purposes, including interest payments on debt as well as leases.
With any company in financial stress, liquidity is always a key issue. The injection of funds by the Treasury Department is being used for specific actions needed to right the ship, like catching up its contributions to the Teamsters’ Central States pension fund.
The uses of the funds announced by YRCW would not be considered liquidity. Moody’s described liquidity at YRCW as “adequate.”
Indirectly, the $700 million will boost the company’s liquidity. “Moody’s estimates that the $300 million tranche A of the CARES Act loan will be ample to cover deferred employee health care and pension costs and other contractual obligations, while the $400 million tranche B for investments in tractors and trailers could help to sustain a greater cash balance over the next 12 to 18 months,” it wrote in its report.
While YRCW CFO Jamie Pierson told The Wall Street Journal that the company faced no maturity payments until 2024, Moody’s said the company does have $70 million of obligations under the Contribution Deferral Agreement with pension plans, presumably the Teamsters, in December 2022. Moody’s also referred to a waiver of a term loan covenant until December 2021, with an EBITDA covenant kicking in at the time. But Moody’s said the level required is “unlikely” to be breached by YRCW.
The company’s ratings are listed as “stable,” meaning they are unlikely to be increased or decreased in the near future. Moody’s expects that YRCW “will be able to increase its earnings in the next 12 to 18 months such that (adjusted) debt/EBITDA will trend towards seven times, provided that the recovery in the US economy takes hold.”
The report noted that the debt/EBITDA spread for now will blow out due to the Treasury action. It doesn’t give an estimate but says debt is expected to increase by 25%. YRCW listed debt of $880 million at the end of the first quarter.
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