Understanding the YRCW Bailout

On July 1, 2020 the U.S. Department of the Treasury announced that it was providing YRC Worldwide with a two-tranche loan that would 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 is required to issue the Treasury Department shares of common stock, which YRC expects will equate to a 29.6% equity stake in the company.

The press release stated that “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.”

It is noteworthy that this is the first time the U.S government has taken a large stake in a company seeking a bailout in the wake of the coronavirus pandemic. It is also the first loan announced from the $17 billion relief fund created by U.S. lawmakers to help "businesses critical to maintaining national security."

To make sense of this bailout, it is worth taking a trip back in history. In the early 2000s there were three large unionized LTL carriers, Consolidated Freightways, Roadway Corporation and Yellow Freight System. Back in 2002, Consolidated Freightways Corp., America's third-largest trucker laid off about 15,500 workers, shut down its operations and filed for bankruptcy.

On July 9, 2003 The Yellow Corporation, America's second-largest trucking company sought to take a dominant position in the less than truckload sector by acquiring the industry leader, the Roadway Corporation. The deal created the Yellow-Roadway Corporation, with more than $6 billion in annual sales.

Financial analysts hailed the deal as bringing needed consolidation to an industry that had been struggling to stay profitable. Yellow agreed to pay $966 million, or about $48 a share, for Roadway, whose stock had closed at just $30.02. YRC’s leaders initially decided to operate the two companies separately. Roadway kept its offices in Akron, Ohio, even though the combined company was based at Yellow's headquarters in Overland Park, Kan. Each was to keep its network of more than 300 freight terminals.

Even back at that time, Gregory E. Burns, a transportation analyst at J. P. Morgan noted that ''this industry has too many terminals, too many trucks, too much capacity . . . They have to look at overlapping operations and cut capacity.'' These revenues increased with the $1.5 billion acquisition of USF Corp in 2005 to a high of $9.9 billion in 2006.

Then the problems began. The execution did not match the promise of the strategy. Even as Yellow Roadway integrated operations, the company reported a net loss of $974 million for its 2008 fiscal year and a net loss of $622 million in 2009. Towards the end of 2009, YRC narrowly averted bankruptcy protection by successfully persuading its bondholders to exchange their $470 million in bond notes for roughly 94% of the company’s shares. In September 2011, the company completed a financial restructuring that essentially eliminated any shareholder equity. All employees, Teamsters included, took large pay cuts to keep YRC in business.

For the past decade, YRC has been a consistent underperformer. Revenue has been stagnant for years and the company usually produced a net loss or modest profit while being barely positive on a cash flow basis. The company had been stuck in neutral when compared to its peer group.

On the surface, it did not appear that YRC was in an immediate dire situation. Then YRC stated in their quarter 1 earnings release that “based on our current expectations and in conjunction with the Covid-19 pandemic, we think it will be unlikely that we be in compliance with the Adjusted EBITDA covenant when it becomes applicable again at the end of the first quarter of 2021 or possibly the liquidity covenant required by the amendment to our term loan facility over the specified period that covenant is applicable. As a result, we will need to either seek an extension of the waiver period or otherwise modify the covenant.”

The current covenant requires the company to maintain $200 million in adjusted EBITDA on a trailing twelve-month basis, measured every quarter. The company hit only $210.9 million at the end of 2019. This is another indicator the company was in a danger zone before the pandemic hit.

William B. Cassidy, Senior Editor of the Journal of Commerce stated that “the US Treasury Department decisively settled the question of whether YRC Worldwide would survive the COVID-19 pandemic and recession, as revenue contracted, costs rose, and cash reserves shrank. The $700 million loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act . . . is enough to quell any remaining doubt.”

“Now they’ve got breathing room for not just a few weeks or months but for years,” Satish Jindel, president of SJ Consulting Group, told JOC.com. “They’ve got an even better deal than what they could have received working through their banks.”

“This should assure YRCW’s medium-term survival, although this isn’t a permanent lifeline,” as the loan matures in just over four years, investment research firm Wolfe Group said in a note to investors.

Investment analyst Greg Wajda noted that, “making the situation worse, the company's balance sheet is very poor. They have over ~$800 million in long-term liabilities, including ~$200 million in pension and post-retirement obligations. Their cash reserves stood at only $100 million, which again, would normally be tight but fine had their income statement results held up. The company has a negative overall equity position with a consistently negative retained earnings category, another clear sign of a heavily indebted company.

It appears that while this backstop keeps the company afloat, it fails to resolve many of the longer-term issues the company faces . . . The government can't lend you EBTIDA . . . It appears this band-aid was already waterlogged when applied and is likely only to buy the company a very short amount of time.”

The question is whether the government bailout will help fix the underlying problems at YRC. The company appears to be an underperforming business even when the economy is good. YRC still needs to demonstrate that it can operate a profitable business without relying on asset sales or employee wage cuts.

This suggests three likely paths for the future. Hopefully the company will be able to achieve the vision of its CEO Darren Hawkins, to “reorganize and consolidate its separate subsidiaries into one network with five distinct brands: YRC Freight and regional trucking companies Holland, Reddaway, and New Penn, and non-asset subsidiary HNRY Logistics.“ The company may ultimately need to seek a buyer that can integrate YRC’s customer base into its existing business while continuing to serve the government’s defense business. Another option may be to file for bankruptcy so it can sell off its terminals and customer list to a designated group of carriers.

YRC has been a survivor. We will all be looking to see if the government’s lifeline will propel the company onto a sustainable track.

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