YRCW remains focused on debt-swap, company restructuring

During its recent first quarter earnings call, YRC Worldwide (YRCW), the financially ailing second-largest LTL company which has lost in excess of $2.7 billion the last four years, reported a $102 million loss in the first quarter on a 5.6 percent rise in revenue to $1.1 billion, compared with a $233 million loss in the 2010 first quarter.

Despite the loss, the company fared better than it did during the first quarter of 2010, when it reported a $233 million loss.

Harsh winter weather was partially to blame during the first two months of the quarter and company officials are encouraged by YRCW’s performance since. YRC also says it has enjoyed six straight quarters of year-over-year operational improvements.

“We are encouraged by the continued year-over-year improvement in our operating performance,” said outgoing YRCW Chairman and CEO William D. Zollars, who is scheduled to leave the company this summer following completion of its financial restructuring.

And YRCW officials are buoyed by some improvements. YRCW National shipments are up 6.3 percent per day and revenue is up 3.3 percent; YRCW Regional is doing even better, shipment count up 9.8 percent per day and revenue per shipment up 7.7 percent.

Also, the company detailed terms of its latest debt swap plan, and has engaged Morgan Stanley to arrange a new $400 million asset-based loan facility that Zollars says will “enhance our liquidity and strengthen our balance sheet.”

The company said its latest debt swap plan is supported by more than 95 percent of its senior secured lenders. Under terms of the agreement, shareholders will hold less than 2.5 percent of YRC stock, which has been battered throughout the worst recession to hit trucking companies in more than 70 years.

Also on board with the plan are the Teamsters union, its multi-employer pension plans and all the lenders covered by its asset-backed securitization loan facility. Rank-and-file Teamsters already have ratified a 15 percent wage concession and pension freeze. YRCW will once again this summer begin making pension contributions, albeit at a much lower rate than before. Those payments are expected to cost YRC about $6 million to $8 million a month, compared to the previous $30 million to $35 million a month.

“Continued changes in our labor agreement continue to provide efficiencies,” said Mike Smid, YRCW president and its chief operations office. Smid said there would likely be further consolidations in its national network as it continues to compress its network and improve freight density.

During the first quarter of 2011, the company reported operating cash usage from operations of $46 million primarily due to $34 million in working capital requirements. Working capital changes included a $55 million increase in receivables due to the sequential growth in operating revenue and the seasonal timing of payment for certain operating expenses.

On March 31, YRCW reported cash and cash equivalents of $157 million, unrestricted availability of $8 million and unused restricted revolver reserves of $71 million, subject to the terms of the company’s credit agreement.  By comparison, at December 31, 2010, the company reported cash and cash equivalents of $143 million, unrestricted availability of $51 million and unused restricted revolver reserves of $71 million, subject to the terms of the company’s credit agreement.  

“When we announced the non-binding agreement in principle in February, we noted that our primary objective was to achieve a comprehensive restructuring with a solid foundation for long-term success,” John Lamar, YRCW chief restructuring officer and lead director of YRC Worldwide, said in a statement. “With these agreements, we believe that foundation is now in place, and we remain on target to close the restructuring in July.”

Under the restructuring plan, YRCW gets an immediate infusion of $100 million in new capital to help it stay afloat. YRCW says it also will receive “increased liquidity” from a new asset-based loan (ABL) facility, replacing the current ABS facility.  In addition, the restructuring plan contemplates that a portion of the company’s existing loans and other obligations will be exchanged for new securities, including the exchange of some obligations for equity.

This debt-for-equity swap is expected to be accomplished by a series of transactions to be completed in July, YRCW said. As a result, YRC’s existing shareholders holding approximately 2.5 percent of the company’s outstanding common stock would be subject to further dilution by a management incentive plan and the conversion of certain new securities. 

When the plan is done, it’s anticipated that a new, preferred class of stock would account for 72.5 percent of its outstanding shares.

YRCW executives went out of their way to praise the Teamsters union, which previously has supported the company through a series of wage and pension concessions dating back to 2009. YRCW employs about 25,000 Teamsters, making it the second-largest freight employer of the union (after UPS, with more than 270,000 Teamsters).

“We sincerely appreciate the support given to YRC Worldwide from our lenders, the pension funds and the Teamsters,” Lamar said.  “With our stakeholders having shown their confidence in the company by executing these definitive agreements we look forward to completing the restructuring as we have previously announced.” 

The credit agreement announced in late February was YRCW’s 20th such agreement. A recent report in the Kansas City Business Journal stated that YRCW has deferred more than $139 million in pension payments to Teamsters multi-employer plans.

Besides the Teamsters, YRCW’s lenders have been uncharacteristically patient with YRCW, largely because they must feel that they would not be sufficiently compensation in a Chapter 7 liquidation. That’s because of the decline recently in used truck valuations. YRCW has closed terminals and reduced its geographic footprint, which has resulted in a company about one-half the size it was about four years ago. But the company has survived an industry price war led by some of its major competitors, including Con-way and FedEx Freight.

Some analysts slammed YRCW’s performance and cast doubt on the company’s recovery plan. Ed Wolfe, principal of Wolfe Trahan research company, called YRC’s first quarter “a major step backwards operationally.” Wolfe rates YRC’s stock, now selling in the $1.30 per-share range, “underperform.”

David Ross, the respected trucking analyst at Stiefel Nicolaus, has issued a “sell” rating for YRCW stock, and is suspending its estimates for YRC Worldwide until the company completes its targeted restructuring, if it is able to do so. YRCW’s current financial situation remains “dire and we believe almost nearly immediately unsustainable without a financial restructuring,” Ross wrote in a note to investors.

Ross said YRCW’s problems are its yield growth was the worst in the LTL industry in the first quarter. After adjusting for the heavier average weight per shipment and excluding fuel surcharges, Ross said he thought YRCW’s pricing was down year-over-year at YRC National.

“In our view, YRCW is stuck over a barrel by its big corporate accounts,” Ross said. Large, national accounts typically pay less than smaller accounts. YRCW has eliminated some overhead by closing unprofitable terminals (It says it is down to 296 terminals at National, down 35 since the first of the year, and 133 for its regional network). That 429 total is down by about a third from its high-water mark five years ago.

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