The claws are coming out already, with some industry onlookers questioning the government’s rationale behind making a huge loan to less-than-truckload (LTL) carrier YRC Worldwide (NASDAQ: YRCW), a perpetually struggling company and one that the government’s own Defense Department alleges overcharged it for services. The loan’s placement under the umbrella of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which is intended to help businesses survive the economic downturn caused by COVID-19 and maintain employment for their workers, is only drawing more scrutiny.
On Wednesday, YRC Worldwide announced its latest lending agreement, a $700 million, two-tranche program that will allow it to make delinquent health and welfare and pension payments as well as fund capital expenditures for its tractors and trailers. As part of the deal, YRC will be required to issue the Treasury Department shares of common stock, which YRC expects will equate to a 29.6% equity stake in the company.
‘Critical to maintaining national security’
In a Wednesday statement on the lending agreement with YRC, the Treasury Department asserted that the carrier is “critical to maintaining national security.”
“YRC is a leading provider of critical military transportation and other hauling services to the U.S. government and provides 68% of less-than-truckload services to the Department of Defense. This loan will enable YRC to maintain approximately 30,000 trucking jobs and continue to support essential military supply chain operations and the transport of industrial, commercial, and retail goods to more than 200,000 corporate customers across North America,” the statement continued.
The Treasury Department referenced a provision of the act as creating the authority for the loan. The act appropriated $500 billion in lending for companies to bridge the COVID gap and keep employees on the payroll. Funding totaling $17 billion was set aside for businesses that are integral to maintaining the country’s defense.
The “financial protection of the government” section of the act requires the Treasury Department to take an equity stake or a senior debt status on the new debt if the borrowing company’s shares are traded on a national securities exchange. The department said taxpayers are receiving “proper” compensation for the loan with the 30% equity stake in YRC.
The agreement will include provisions for YRC to maintain certain employment levels and limit executive pay. The Treasury Department is prohibited from exercising voting power of any of the shares it owns. The shares will be held in a voting trust and voted in a way that is proportionate with how the company’s other shares are voted.
The hand-wringing
One issue is whether the loan to YRC will be seen as a backdoor government bailout of underfunded pension plans that are in critical or declining status as they carry more pensioners receiving benefits than employers making contributions. This was a sticking point for legislators as they hammered out the details of coronavirus relief, with multi-employer pension funding ultimately not making it into the final package. Central States, to which YRC is the largest contributor, is one such pension fund. YRC has estimated its pension liability to be $8 billion if it were to fully withdraw from the plans or they were to terminate.
The company’s financial weakness caught the notice of Catherine Rampell, a syndicated columnist at The Washington Post who said in a Wednesday tweet, “US Treasury is giving a $700 million loan to YRC Worldwide, a troubled trucking company with a market cap of $70 million as of Tuesday’s close.”
In a note to clients, Deutsche Bank (NYSE: DB) analyst Amit Mehrotra said, “On the critical side, the company’s current position is not due to Coronavirus; instead, we see it as the product of a decade of underinvestment, as well as limited flexibility due to union representation in its workforce.” He went on to contrast YRC’s labor structure with the “flexibility” the non-union carriers have around workers’ schedules, which allow them to better manage headcount. “On the positive side, it appears this loan will allow workers to have visibility on benefits, as well as allow YRCW to partly recapitalize its fleet/equipment,” said Mehrotra.
A key concern is whether the financial outlay is warranted for a company that has struggled to stay in business for more than a decade and faces several structural headwinds — high debt, a costly union labor structure, and an aging fleet and technology. That raises questions about whether the loan is indeed simply a short-term bridge for a company that incurred financial misfortune due to pandemic-related shutdowns, and whether it is in fact integral to the nation’s security.
U.S. Sen. Pat Roberts, R-Kansas, in whose state YRC is based, apparently had no such qualms. “YRC Worldwide Inc. is critical to not only #Kansas but to the entire country as a whole. I appreciate @stevenmnuchin1 [Treasury Secretary Steven Mnuchin] for recognizing this need in the heartland, and I will continue to advocate for the workers and families affected by #COVID19 throughout our great state,” Roberts tweeted late Wednesday.
YRC CEO Darren Hawkins was named to the President’s Great American Economic Revival task force in April. Hints of potential help from the government appeared in a recent memo from Teamsters brass to the rank and file. The letter said YRC had sought further assistance under the CARES Act and that Sen. Jerry Moran, R-Kansas, and Mnuchin had specifically referenced the company’s financial issues in a recent U.S. Senate banking hearing.
From the Treasury statement Wednesday: “We are pleased for Treasury to make this loan pursuant to the CARES Act. This loan will enable a critical vendor to the Department of Defense to maintain significant employment while providing appropriate compensation to taxpayers,” said Mnuchin.
YRC lagging its peers
YRC has stared into a financial abyss before.
Over the past decade-plus, the company has restructured operations, renegotiated debt financing, sought wage and benefit deferrals, and even wiped out shareholders with dilutive debt-for-equity swaps, all on more than one occasion.
The carrier was profitable in the first quarter of 2020 but required nearly $40 million in gains on property sales to post a $4.3 million profit. YRC’s $28.3 million interest expense in the quarter eclipsed its $28 million in operating income, which had the benefit of the outsized gains on asset sales.
The company listed “substantial doubt” about its ability “to continue as a going concern,” in its first-quarter filing with the U.S. Securities and Exchange Commission on May 11. Further, YRC’s midquarter update through the first two months of the second quarter implied revenue-per-day declines in the high-20% range during April and low-20% range during May.
The result was worse than those of competitors ArcBest Corp. (NASDAQ: ARCB) and Old Dominion Freight Line (NASDAQ: ODFL), which saw year-over-year revenue declines around 20% in April and in the mid- to high teens in May. Johns Creek, Georgia-based SAIA (NASDAQ: SAIA) reported a 12.9% year-over-year decline in April tonnage, with May tonnage down only 8.8%. The carrier didn’t provide yield metrics.
The best time to let YRC fail may have been during the pandemic as other consistently profitable LTL carriers were forced to jettison network capacity and workers to lower their costs as volumes sagged. The COVID-19 shutdown likely offered a rare opportunity for the industry to absorb nearly $5 billion of freight as most carrier networks had idle capacity and could likely bring it on with minimal supply chain disruption.
‘Proper taxpayer compensation’
Entering the day, YRC’s market capitalization, the total dollar value of its outstanding shares, stood at approximately $66 million. Shares of YRCW surged 75% on news of the bailout, raising the company’s market cap to $115 million by day’s end. Even with the stock’s run on Wednesday, the company’s market cap is a fraction of the bailout amount and the stock is still off 80% from 2018 highs. A debate on whether taxpayers were properly compensated for or protected from the risk is likely to ensue.
While the $700 million financing will address some of the carrier’s obligations ($345 million in lease and $231 million in pension and post-retirement liabilities), thereby improving its cost structure, the company still has roughly $880 million in debt to contend with and still operates from a structurally weaker operating position than its peers.
Department of Defense lawsuit
YRC is also subject to another potential obligation according to its quarterly filing. This one stems from a Department of Defense complaint alleging overcharging for freight carrier services, “unjust enrichment or a payment by mistake” and “failing to comply” with contractual terms and government procurement rules.
The government alleges that YRC Freight, Yellow Transportation and Roadway Express inflated shipment weights, billed the Defense Department using improper rates and falsified statements in efforts to conceal their actions for a period of more than seven years.
YRC was formerly Yellow Transportation prior to re-branding. LTL carrier, Roadway Express, was acquired by Yellow Transportation in 2003.
The three carriers are specifically accused of reweighing thousands of shipments and not disclosing weights that were lighter than originally estimated, thus knowingly overcharging for shipments due to the inflated weights. The lawsuit claims the defendants made false statements to win business from the Defense Department and to avoid correcting inflated invoices and returning excess payments.
YRC lists the amounts sought by the government as “unspecified,” saying it has moved to dismiss the case for which it has “meritorious defenses and intends to vigorously defend.”
Much of the alleged fraudulent billing occurred under former CEO Bill Zollars who was recently confirmed by the Senate to the United States Postal Service’s Board of Governors.
“In this case, YRC did not legally fulfill its agreed upon obligations to the Defense Department, choosing instead to line its pockets with taxpayers’ dollars. Such actions are fraudulent and illegal. This case should serve as a warning to any organization that enters into a contract with the federal government — if you try to rip us off, be prepared to pay a heavy price,” said U.S. Attorney James P. Kennedy Jr. for the Western District of New York in a December 2018 statement.
That places the government in an odd position: It is both a stakeholder in and plaintiff against YRC.
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