YRC Worldwide (NASDAQ: YRCW) unveiled plans of a new $700 million lending agreement with the U.S. Department of the Treasury, which in turn will receive a stake of nearly 30% in the company.
The July 1 press release outlines the latest lifeline for the less-than-truckload (LTL) carrier. The loan comes from a federal lending program under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which is intended to help businesses survive the economic downturn caused by COVID-19 and maintain employment for their workers.
The lending agreement will allow YRC to repay recently deferred health and welfare and pension payments to the funds that support its 24,000 Teamster employees, including the underfunded Central States pension and health funds in which YRC is the largest contributor. The loans will also allow the carrier to make updates to its aging fleet.
Some may also see this as a bailout of Apollo Global Management (NYSE: APO), which provided YRC with a $600 million term loan in September.
“We would like to thank Congress for passing the CARES Act and the U.S. Department of the Treasury for providing this vital funding which recognizes the essential role YRCW plays in the nation’s supply chain. Through our work with over 200,000 customers, including being a leading transportation provider for the departments of Defense, Energy, Homeland Security and Customs and Border Protection, YRCW’s freight professionals have developed a deep understanding of, and expertise in, the importance of a secure and reliable supply chain,” said YRC CEO Darren Hawkins.
Hawkins was named to the President’s Great American Economic Revival task force in April.
$700 million loan and the government’s equity stake
The $700 million lending agreement has two equal tranches. Tranche A will be used to fund “short-term contractual obligations,” including the aforementioned pension and healthcare payments. This tranche carries a rate of LIBOR plus 3.5% with interest payments requiring 1.5% cash and 2% payment in kind. Tranche B allows the company to fund capital expenditures (capex) on tractors and trailers. This tranche will carry the same interest rate but require all cash repayment. No principal repayment appears to be required until both loans mature on September 30, 2024.
YRC will amend existing credit facilities to permit the new loans. The agreement was entered into on June 30.
YRC will issue the Treasury Department shares of common stock, which are expected to represent a 29.6% equity stake in the company. YRC said it is relying on “Nasdaq’s temporary COVID-related exception” to bypass stockholder approval requirements.
Precarious standing at the end of first quarter
Management avoided the customary question and answer session on its first quarter conference call citing uncertainty around the pandemic. However, analysts likely had questions loaded on the healthcare payment deferrals and the company’s acknowledgement in the earnings release that it would likely need another financial covenant waiver.
YRC ended the quarter with nearly $104 million in cash and equivalents and $880 million in debt. The company’s available liquidity increased $38 million from the end of 2019 to $118 million due to a host of cost reduction efforts and the deferral of many of its obligations. Layoffs, furloughs, cuts to short-term incentive compensation, reduced capital investment, the deferral of lease payments and contributions to both non-union and union pension plans were some of the moves the carrier made to preserve cash.
Cash used in operations was less than $16 million during the quarter compared to $42 million in the first quarter of 2019.
Further, the quarterly earnings result – net income of $0.12 per share compared to the consensus estimate of a $0.57 per-share loss – greatly benefited from $39.3 million in net gains on property sales versus a $1.6 million loss on property disposals in the prior-year period.
Clouds were again forming over the carrier as its obligations were growing, the pandemic was wreaking havoc on operations and it wasn’t going to be able to continue to unload property to offset operating losses. However, these headwinds aren’t new to the carrier, which many view as operating from an unfavorable position given its high debt balance, costly union labor structure and dated fleet and technology.
Been down this road before
YRC has faced many financial hurdles in the past.
In 2009, the carrier was in a perilous position. It had to find a solution for pending debt payments and appease its union workforce, which had already conceded to reduced wages. Further, the carrier was tasked with attracting freight to its network even as competitors underpriced them and their customer base was seeking other alternatives, with both assuming that the carrier would fail.
After months of credit agreement amendments and extensions from its lender group, the carrier was finally able to craft an eleventh hour $470 million debt-for-equity deal in the closing hours of 2009. That deal deferred $19 million in pending interest and fee payments, $20 to $25 million per quarter in 2010 and gave the carrier access to $160 million in liquidity under its revolving credit facility. The deal also wiped out existing shareholders including union stakeholders, leaving former bondholders owning 94% of the company’s outstanding shares.
The deal was preceded by two rounds of wage concessions from union employees. At the beginning of 2009, the union agreed to 10% wage cuts for a 15% stake in the company. Later in the year, another round of wage cuts, this time an additional 5% as well as pension funding deferments, would be required to get the equity deal done. Approximately a year later, those wage concessions would be extended into 2015 in exchange for additional equity and the union receiving a second seat on the board.
Saved from bankruptcy and with a little financial breathing room, YRC accelerated its corporate overhaul. These efforts included divesting non-LTL offerings. In 2009, YRC unloaded its dedicated unit and in 2010, the company sold a stake in its logistics operations to private equity to provide incremental liquidity. In 2011, the carrier sold its truckload (TL) operations, Glen Moore, to now defunct Celadon and in 2012, YRC sold its stake in Chinese TL and LTL operator Shanghai Jiayu Logistics to its joint venture partner.
All the while, the liquidity improvement measures – including selling and leasing back facilities, reduced equipment capital expenditures, credit amendments, pension deferrals sometimes requiring real estate as collateral, etc. would be required to keep the company afloat.
The debt-for-equity swap transactions would be required again. In 2011, the company orchestrated a deal carving out $100 million in new capital, a new $400 million loan, deferred debt and pension payments until 2015 and the Teamsters owning a larger stake in the company. Existing shareholders saw their positions reduced to just 2.5% of the outstanding stock.
Reverse stock splits would be required to prop up declines in the share price as a result of the equity dilution. The company completed a 1:25 reverse split in 2010 and a 1:300 split in 2011 to comply with NASDAQ listing requirements for shares to maintain a $1 level.
Facing debt maturities, the company again completed a debt-for-equity deal in 2014, relieving $300 million in debt after successfully negotiating with the lending group and the union. That deal paved the way for the company to refinance $1.1 billion in debt, placing its capital structure on a more stable footing for a while.
Latest restructuring and beyond
YRC remains in perpetual turnaround efforts, the latest referred to as a “multi-year enterprise transformation strategy.” In recent months, YRC has reorganized the leadership team and its enterprise-wide sales force from four teams to one with a focus on “operational optimization.” More specifically, the carrier aims to improve asset utilization and expand its service offering through structural changes to the network.
Part of those changes include the process of migrating all of its separate operating units onto the same technology platform. YRC Worldwide is the holding company for LTL carriers Holland, New Penn, Reddaway and YRC Freight along with logistics company HNRY Logistics. Prior to 2020, the company had two reportable segments; regional, which was focused on regional and next-day deliveries; and its long-haul national unit, YRC Freight. YRC now reports its five brands as one company on a consolidated basis.
YRC’s goal is for its customers to be able to access all five entities through one network under one point of contact.
The latest move from the Treasury Department gives the company breathing room for now and adds a new stakeholder in YRC. Many contend the carrier’s stakeholders – the company, the union, the lenders – have no leverage over one another when it comes to labor and debt negotiations, all to some extent forced to accept unfavorable terms to keep the entity afloat. All of them now have a new stakeholder to contend with – the federal government.
Shares of YRCW are up more than 50% on the news.
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