Treasury’s first explanation of YRC loan not enough

YRC double on highway

It appears that the Department of the Treasury’s proactive attempt to respond to the Congressional Oversight Commission’s concerns regarding the rationale behind the $700 million loan to less-than-truckload (LTL) carrier YRC Worldwide (NASDAQ: YRCW) will not suffice.

In the third report from the commission overseeing the distribution of funds provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to businesses struggling from the impact of the pandemic, several queries were laid out as to why a lending package was provided to YRC.

Treasury department explains rationale for loan

On July 30, the Treasury Department proactively penned a letter to the commission addressing the rationale. A sticking point for the commission was YRC being designated as a “business critical to maintaining national security.”

The letter stated that the department was given authority to make loans to “businesses critical to maintaining national security” and that the loans be related to “losses incurred as a result of coronavirus.” The Treasury Department contended the CARES Act didn’t spell out specifically which companies would qualify for loans and that it issued specific guidance identifying qualifying companies in April. The department decided the “national security” designation would apply to businesses operating under a high-priority defense contract, operating with top-secret security clearance or if the secretary of defense or the director of national intelligence recommended and certified that the company met the standard.

YRC, which provides 68% of the Defense Department’s LTL services hauling food, electronics and other supplies for the military domestically, qualified under the third option.

The letter said that as the pandemic hit, the company’s shipments fell nearly 30% in the four-week period extending from March 13, presumably the department’s justification of the requirement that a company’s losses are related to coronavirus.

The Treasury Department said the company’s revenue decline created a “liquidity crisis,” requiring YRC to delay contribution payments to health and pension plans. The department said a pending termination of coverage would have resulted in a strike from 25,000 of its union employees, forcing the carrier to file for bankruptcy. Such a failure would have “disrupted the operations of critical federal agencies and the U.S. supply chain, undermining the economic recovery.” YRC has roughly 30,000 employees and more than 200,000 customers, according to the letter.

The letter stated, “Members of Congress on both sides of the aisle wrote to Treasury to relay such facts and circumstances and to encourage Treasury to give ‘full and fair consideration’ to YRC’s request for liquidity under section 4003 of the CARES Act.”

The previous report from the commission also called out other shortcomings in the deal. “The interest rate on YRC’s loan from Treasury is 4% lower than the interest rate on the company’s most recent debt financing.”

The Treasury’s letter showed that the department established a “credit test” for potential borrowers, requiring they meet two of three qualifying thresholds for debt leverage, debt service coverage and collateral. YRC met all three of the underwriting criteria.

Further, the department said that the rates on the YRC loans, LIBOR plus 3.5%, were set at a rate 0.5% higher than those “applicable to loans made by banks participating in the Federal Reserve’s Main Street Lending Program (MSLP).” The letter said that program was set up to provide bridge financing to companies with “speculative-grade credit risk whose revenues were negatively affected by the economic impact of the COVID-19 crisis.” The Treasury said MSLP loan rates were set at a “penalty rate” and “the interest rate on the YRC loan is 0.5 percentage points higher.”

The commission previously expressed concerns over the risk involved with loss of taxpayer money as “strikingly higher” than other loans under the program. The group also called into question the company’s past financial struggles and being at risk of bankruptcy prior to the outbreak as concerns. The Treasury said the loans were “sufficiently secured” as the company has pledged assets – existing fleet, real estate and accounts receivable – of nearly $1.6 billion as collateral, $546 million higher than the company’s previous debt level.  

Additionally, the $400 million second tranche designed to update the carrier’s aging fleet, requires quarterly approval from the Treasury and gives the government first-priority lien status on all of the new equipment purchased. The Treasury Department laid out a scenario wherein the loans would be 124% collateralized even if YRC were to exhaust Tranche B, which it plans to, and taking into account a 20% discount in the event of forced liquidation of the new equipment.

YRC’s management team believes they can save roughly $10,000 per tractor annually by running newer equipment, which will drive improvement in maintenance expenses, insurance costs and fuel efficiency.

The Treasury also reiterated the government’s near-30% equity stake valued at approximately $40 million at the time of the letter, now more than $80 million, as appropriate taxpayer compensation.  

In the “background on YRC” section of the letter from the Treasury, it indicated the company’s “revenue is projected to fall 16% in 2020 compared to 2019″ without a supporting footnote sourced. Current consensus estimates are only calling for a 7% decline.

Oversight commission seeking more information

The fourth report issued Friday from the commission included the Aug. 7 letter sent to Treasury Secretary Steven Mnuchin, which acknowledged the department’s proactive explanation and offer of additional information. 

However, the letter continued along the same path as the initial report questioning YRC’s classification as “critical” to national defense and noting the potential for “significant risk” exposure to taxpayers. Further, it discusses the company’s past financial struggles, including credit downgrades and close calls with bankruptcy, and the seemingly low interest rate established on the new loans.

The letter questions how prior health and pension payment deferrals as well as fresh capital for investment in the fleet were “losses incurred as a result of coronavirus.” Further, it asks why the department was left with only third-priority liens on physical assets.

The commission has asked for “all documentation, analysis and recommendations” used in the decision-making process both internally and from third parties. The commission’s letter also seeks to see the uniform standard for measuring “appropriate taxpayer protections” previously agreed to by the Treasury as well as a status on the other applications received. The commission is seeking a response by Thursday.

On the same day, a separate letter was sent to Defense Secretary Mark Esper asking about his recommendation regarding YRC and if the Defense Department attempted to contact other carriers for replacement service.

As of YRC’s second-quarter financial report on Aug. 3, the carrier had used $245 million of the $300 million allotted in Tranche A for repayment of deferred health, welfare and pension payments. The company hadn’t touched any of Tranche B as of the report. When asked on the call if there was concern over the second loan being pulled, CFO Jamie Pierson said, “We don’t see any reason why we wouldn’t get that fully funded between now and when we need to exhaust all $400 million of it.”

At the time of the loan, YRC’s market cap was less than one-tenth of the loan amount. Shares of YRCW have nearly tripled since the July 1 announcement of the loan.

FreightWaves has reached out to YRC for comment.

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