The Treasury Department’s decision to provide debt-burdened less-than-truckload (LTL) carrier YRC Worldwide (NASDAQ: YRCW) $700 million in financing has drawn scrutiny from members of Congress.
A Monday report from the Congressional Oversight Commission created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), calls into question the designation of YRC, which provides 68% of LTL services to the Defense Department, as a “business critical to maintaining national security.”
Under the federal lending program established by the CARES Act, a “catch-all provision” created by the Treasury Department allows it to determine if a company meets the national defense standard based only on the recommendation and certification of either the secretary of defense or the director of national intelligence.
The program was originally envisioned for companies like Boeing (NYSE: BA) and General Electric (NYSE: GE) with the report stating that “given the types of sophisticated services and products these two companies provide for our national defense, it is not hard to argue that they are critical to maintaining national security.”
It added: “It is far from clear that the fourth-largest LTL shipping company in the United States is critical to maintaining national defense because it reportedly delivers ‘food, electronics and other supplies to military locations around the country.’”
The report said the risk of loss of taxpayer money on the loan “appears high” and “strikingly higher” when compared to other loans under the program. The report called out the company as being “non-investment grade for over a decade” and noted that it had “struggled financially for years before the COVID-19 crisis,” even being “at risk of bankruptcy before it obtained a loan from the Treasury.”
The interest rate on the lending facility was highlighted as well. “The interest rate on YRC’s loan from the Treasury is 4% lower than the interest rate on the company’s most recent debt financing.”
The commission said it intends to “conduct further oversight of [the Treasury Department’s] decision.”
As part of the deal, YRC was required to issue the Treasury Department a near-30% equity stake in the company, an amount the Treasury Department deemed “proper taxpayer compensation.” The report called into question YRC’s “previous close calls with bankruptcy,” saying “it is not clear that an equity stake in YRC will provide much, if any, compensation or protection to taxpayers.”
YRC’s own board appeared to have the same concern with the company’s equity last year.
YRC’s board favored cash compensation over company stock
YRC’s board of directors may not have had much faith in the company’s equity either. At the end of 2019, compensation plans for directors on the board were amended to allow for a higher percentage of cash payment, minimizing the portion of stock-based compensation.
The 2019 comp plan for nonemployee directors on the board at YRC paid a $75,000 cash retainer, $125,000 for the chairman, and amounts ranging from $10,000 to $25,000 for service committee chairs. Further, directors who served on labor or strategy committees that commenced one year ahead of the ratification of the new labor deal received an additional $40,000 annually.
The director compensation plan was amended and restated on Feb. 11, 2019, when shares of YRCW closed the day at $6.80. That amendment allowed an annual fully vested restricted stock unit (RSU) award equal to $125,000 with a settlement date three years after the grant date. The amendment also provided one-time performance RSUs equal to $152,760. Those units had an additional vesting requirement that YRCW’s average share price equal or exceed $11.75 for a 30-day period prior to the end of 2020, a level not seen since early 2018.
The performance RSUs “were awarded in addition to the Annual RSUs for the directors’ oversight of Company’s management in developing a comprehensive business strategy to achieve long-term profitability and stability for the Company.”
All of 2019’s directors ended up forfeiting the performance RSUs given the unlikelihood of achieving that stock price threshold.
At the end of 2019, faced with the unlikelihood of reaching and sustaining the $11.75 share price, the board decided to adopt a new, nonemployee director compensation plan favoring cash payments versus equity.
On Dec. 9, the board adopted a new director plan paying an annual cash retainer of $190,000, $300,000 for the chairman. Equity comp was reduced from $125,000 to $60,000. The new $250,000 package, excluding the performance RSUs, represented a $50,000 increase in pay and importantly doubled the percentage of cash compensation to 76%.
YRCW’s closing share price was $3.06 on Dec. 9, a 55% decline from the February amendment.
A reduction in board size with three members volunteering to resign on Dec. 11 was provided as justification. “While individual annual compensation per director increased, total compensation paid to the Board decreased due to the decrease in Board size,” the filing stated. The net reduction was two seats as the company’s new CFO joined the board.
The board even prorated the roughly last three weeks of 2019 pay to reflect the new plan.
YRC would go on to record a $104 million net loss in 2019.
The oversight report summarized: “This loan may indicate that the Treasury believes the national security designation permits a much higher risk tolerance to provide relief to firms that were struggling well before the COVID-19 pandemic. If that is the case, the Commission would like to better understand the rationale for this risk tolerance, especially in light of the statutory restrictions on national security loan terms and the fact that the single such loan the Treasury has made — to date — is to a company that may not be critical to maintaining national security.”
Shares of YRCW closed 27% lower on the day.
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