“It is far from clear” YRC “is critical to maintaining national defense because it reportedly delivers ‘food, electronics and other supplies to military locations’” in the US. So what’s going on here?
By Wolf Richter for WOLF STREET.
The US government’s $700-million bailout under the CARES Act of long-troubled YRC Worldwide, one of the largest less-than-truckload (LTL) carriers, has come under fire by the Congressional Oversight Commission, which is supposed to monitor how the trillions of bailout dollars are getting distributed.
The bailout gave the government a 29.6% stake in YRC in lieu of higher market-based interest rates on the loan. That trade-off also came under fire, given the iffy fate of the shares in an eventual restructuring of YRC.
Let’s put something straight first: All bailouts are primarily a bailout of stockholders and bondholders. That was the case in the YRC bailout as well. In the 10 trading days straddling the bailout announcement on July 1 and its finalization on July 8, YRC’s shares [YRCW] soared 122%, from $1.57 on June 25 to $3.49 on July 10.
The company has been wrapped up in a tangle of problems for years. It has been junk-rated for over a decade. Moody’s rates it Caa1 and S&P CCC+, both deep-junk (my cheat sheet for corporate credit ratings). Its shares have collapsed starting in January 2018, from a range of $12-$18 a share to $2.57 at the beginning of 2020, per-Covid. Shareholders weren’t exactly brimming with hope, when the pandemic hit the trucking business.
Why was YRC bailed out, the Commission wants to know.
Two of the Treasury Department’s criteria for a bailout are based on “maintaining national security” – that the company must either be performing under a defense contract of the highest national priority or operating under a top-secret facility security clearance. But the Commission’s report said that YRC didn’t qualify, obviously, under those two criteria.
Instead, YRC qualified “under a catch-all provision created by the Treasury allowing it to determine if a business is critical to maintaining national security based solely on a recommendation and certification from the Secretary of Defense or the Director of National Intelligence.”
And the Commission now “has questions about the decision to deem YRC a business critical to maintaining national security and the process for reaching that conclusion.”
“Secretary Mnuchin has publicly stated that the national security loan program was developed with the thought that Boeing and General Electric might need loans. 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 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.’”
And the Commission has other issues with the bailout.
“The risk of loss of U.S. taxpayer money on this loan appears high. In fact, the Commission notes that the level of risk taken in the loan to YRC appears strikingly higher than the risks associated with the other facilities over which the Commission has oversight.”
“YRC has been rated non-investment grade for over a decade, struggled financially for years before the COVID-19 crisis, and was at risk of bankruptcy before it obtained a loan from the Treasury.”
“Under the CARES Act, a Treasury loan like this one is supposed to be ‘sufficiently secured’ or ‘made at a rate’ that ‘reflects the risk of the loan’ and ‘is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of the coronavirus disease 2019 (COVID–19).’”
“It is questionable whether the loan to YRC meets these standards. 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, which was a five-year, $600 million term loan that YRC obtained in September 2019 before the COVID-19 crisis.”
“As part of the loan agreement, the Treasury has obtained a 29.6% equity stake in YRC to reportedly provide ‘appropriate taxpayer compensation’ for the loan. But given the company’s long-term non-investment grade rating and previous close calls with bankruptcy over the years, it is not clear that an equity stake in YRC will provide much, if any, compensation or protection to taxpayers.”
“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.”
An alternative to a taxpayer bailout.
A debt restructuring in a Chapter 11 bankruptcy proceeding could ensure that a nimble company with a much smaller debt load emerges at the other end – and that’s a long-term benefit to its customers and the economy.
In a Chapter 11 bankruptcy, in essence, creditors take over the company. Still some creditors would come up short. Shareholders often get wiped out, after having already been nearly wiped out over the years due to the declines in the share price. And other stake holders, such as the company’s pension fund that often had been raided over the prior years, would also get hit.
So in the case of YRC, shareholders, creditors, and other stakeholders were bailed out by taxpayers, temporarily. YRC now has $700 million in additional liquidity it can burn through, but then what? It will have an additional $700 million in debt, on top of the debts it already has been struggling with, and it still hasn’t restructured its business and may eventually buckle under all this debt anyway, and head for a restructuring, and then taxpayers can kiss their investment goodbye.
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