By John D. Schulz · July 1, 2020
The U.S. government entered the $46 billion less-than-truckload (LTL) industry by effectively purchasing 30% of financially troubled LTL giant YRC Worldwide in exchange for a badly needed $700 million cash infusion.
The Treasury Department announced on July 1 that it intends to make a $700 million loan to YRC Worldwide in exchange for a 29.6% equity stake in the company. YRC is parent of long-haul giant YRC Freight, the nation’s largest stand-alone LTL company, as well as regional giants Holland (Midwest), New Penn (East) and Reddaway (West).
The loan is authorized under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The government said that Treasury’s determination was based on a certification by the Secretary of Defense that YRC is “critical to maintaining national security.”
The Treasury Department called YRC a “leading provider of critical military transportation” and other hauling services for the U.S. government. Treasury said YRC provides 68% of LTL 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.
“We are pleased for Treasury to make this loan pursuant to the CARES Act,” Treasury Secretary Steven T. Mnuchin said in a statement. “This loan will enable a critical vendor to the Department of Defense to maintain significant employment while providing appropriate compensation to taxpayers.”
YRC, which lost upwards of $2 billion since its disastrous purchase of long-haul rival Roadway Express for $1.1 billion in 2003, has struggled with profitability for most of this century.
In the first quarter, YRC needed asset sales of $39.3 million to swing it into profitability. YRC earned $4.3 million on $1.15 billion revenue in the first quarter, compared with a net loss of $49.1 million on $1.18 billion revenue in the year-ago quarter. But without the asset sales, however, YRC would have suffered a $35 million pre-tax loss.
Subject to definitive documentation with the company and its existing lenders, Treasury said it intends to provide YRC with loans totaling $700 million, maturing on Sept. 30, 2024.
Analysts praised YRC’s cash infusion. A Wolfe Research report entitled “The Cat With 20 Lives – Lifeline from the Government,” said: “This should assure YRCW’s medium-term survival, although this isn’t a permanent lifeline as the $700M loan matures in just over four years on 9/30/24.”
YRC said its four operating units have been “significantly impacted” by the COVID-19 pandemic. These companies collectively employ 30,000, including 24,000 Teamsters. YRC said the CARES Act infusion will be used to pay for deferred employee health care and pension costs and other contractual obligations as well as to support essential capital investment.
“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,” YRC CEO Darren Hawkins said in a statement.
YRC said it has over 200,000 customers, including being a leading transportation provider for the Departments of Defense, Energy, Homeland Security, and Customs and Border Protection. The company said its workers have developed a “deep understanding of, and expertise in” the importance of a secure and reliable supply chain for government-related freight.
“Our 30,000 employees have continued to serve hundreds of quarantined communities across the country during the pandemic and this financial assistance will enable us to bridge this pandemic-related crisis and continue to provide essential shipping services for the nation’s supply chain,” Hawkins added.
He said the funding will also enable YRC to continue successfully implementing its multi-year strategic plan to transform our five powerful brands, including its HNRY logistics unit, to operate as “one company with one network to better serve shippers and the nation’s supply chain as economic recovery takes hold.”
YRC said it will receive a loan of $700 million in two tranches, subject to completion of definitive documentation:
Tranche A includes approximately $350 million, which will be used to cover short-term contractual obligations and certain other obligations including pension and healthcare payments. The loan terms are LIBOR (the London Inter-Bank Offered Rate which is the average interbank interest rate from a selection of banks on the London money market) plus 3.5%, consisting of 1.5% cash and 2.0% payment in kind. This loan matures on Sept. 30, 2024.
Tranche B is for approximately $350 million. It will be used for essential capital investment in trailers and tractors and is expected to carry an interest rate of LIBOR plus 3.5% in cash. This loan also matures on Sept. 30, 2024.
YRC’s existing credit facilities are expected to be amended to permit the new loan. Earlier, YRC had said it was in danger of running afoul of its covenants with lenders because of the upheaval in freight markets due to demand changes from the COVID-19 pandemic.
Under terms of this loan, the Treasury Department will hold YRC common stock shares through a voting trust. The trust will be required to vote the shares in the same proportion as all other unaffiliated shares of YRC stock are voted. The shares will be subject to certain transfer restrictions and YRC has agreed to register the shares for resale pursuant to a registration rights agreement, the company said.
YRC said the agreement will also include “certain provisions” to maintain employment levels and limit executive compensation, dividends and share repurchases.
YRC investors cheered the government’s $700 million cash infusion into the company’s beleaguered stock. In the first hours of trading since the U.S. government announced the deal, YRC stock surged 60% to about $3.15 a share.
July 1, 2020