Bloomberg News

YRC Back at Brink 2 Years After Goldman Spat: Corporate Finance

March 19, 2012

A tractor trailer rolls out of a parking lot at YRC Worldwide Inc. in Carlstadt, New Jersey. Photographer: Jin Lee/Bloomberg

A tractor trailer rolls out of a parking lot at YRC Worldwide Inc. in Carlstadt, New Jersey. Photographer: Jin Lee/Bloomberg

Two years after the Teamsters union faced off against Goldman Sachs Group Inc. to keep YRC Worldwide Inc. (YRCW) out of bankruptcy, the second-biggest U.S. trucker is back on the brink.

Credit-default swaps tied to the company, whose units include New Penn, Holland and Reddaway, imply an 87 percent chance of default, according to data provider CMA. Bonds from Overland Park, Kansas-based YRC, which employed 32,000 on Dec. 31, have lost 50 percent of their value in six months.

Even as a strengthening U.S. economy boosts profits at FedEx Corp. and Con-Way Inc., YRC is set to lose $68.6 million this quarter, according to the average estimate of four analysts surveyed by Bloomberg, which would be its eighth loss in nine periods. Its competitors grabbed market share by lowering prices and attracting customers after YRC averted bankruptcy in 2009 through a debt exchange with a face value of $470 million. YRC’s revenue fell to $4.9 billion last year from $9.9 in 2006 while long-term borrowings rose.

“We don’t have a whole lot of faith that this will work itself out over the near term,” said David Berge, an analyst at Moody’s Investors Service in New York. “There’s still a fairly high likelihood of them being in a default or distressed situation over the next year, year and a half. They’re still burning cash.”

YRC projects it won’t earn enough money to satisfy lender requirements starting in the second quarter, meaning it will have to either negotiate a new arrangement or accelerate debt payments, according to a Feb. 28 filing with the U.S. Securities and Exchange Commission.

‘In Compliance’

If lenders demand repayment, YRC “will not have sufficient cash and cash flows from operations to repay such indebtedness,” it said in the filing.

“The current covenant package and corresponding forecast were set by the previous management team,” Jamie Pierson, YRC’s chief financial officer, wrote in an e-mailed statement. “We fully anticipate resetting the covenants so that we will be in compliance the second quarter and beyond.”

Credit-default swaps on YRC jumped to 44.5 percent upfront on March 7, the highest level since 2009, before falling to 43.3 percent on March 15, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That means the upfront cost to protect $10 million of YRC bonds from default for five years increased to $4.45 million in addition to $500,000 annually.

Bonds Drop

Derivatives traders were demanding 35.2 percent upfront at the end of last year. YRC’s swaps were the fourth-worst performers in the past three months compared with other companies worldwide, according to the data.

Its 10 percent bonds due in March 2015 dropped to 36 cents on the dollar as of March 14 from 72 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Shares of the company have dropped 11 percent this year to $8.91 as of 11:19 a.m. today in New York.

In December 2009, YRC extended a tender-offer deadline six times before bondholders agreed to swap equity for debt, allowing the trucker to delay a $19 million interest payment that would have left it in an “unsustainable” position, according to a regulatory filing at the time.

The bondholder pushback prompted International Brotherhood of Teamsters President James Hoffa to ask federal and state authorities to review “questionable promotion” of credit- default swaps tied to YRC debt. He named Goldman Sachs, Deutsche Bank AG, Toronto Dominion Bank, Barclays Capital, and UBS AG as firms with a “history of making markets” in derivatives trades that would profit from YRC’s bankruptcy.

‘Goal Line’

Goldman Sachs said at the time that the New York-based bank “neither has a position in, nor makes markets in, YRC corporate bonds or credit-default swaps.”

After YRC received bondholder approval, Bill Zollars, its chief executive officer at the time, said Goldman Sachs, Deutsche Bank, Aristeia Capital LLC, Silverback Asset Management and a Smith Management LLC unit “got us over the goal line by going into the market, buying bonds and tendering them.”

Zollars previously said that “the most difficult bondholders to deal with were investors with credit-default swaps that paid off if the company went bankrupt.”

Two years later, YRC’s auditor, KPMG LLP, said the company’s financial condition raises “substantial doubt about the company’s ability to continue,” according to the Feb. 28 filing. The trucker has $175 million of pension payments and $48.3 million of lease obligations due this year, according to the filing.

Top Providers

“The company’s market share substantially declined over the past few years,” Standard & Poor’s analysts led by Anita Ogbara wrote in a Feb. 29 report. As a result of YRC’s “well- publicized financial distress, its competitors sought to gain market share by pricing aggressively.” they wrote.

A ratio of YRC’s costs compared with revenue increased in the past two quarters, while Con-Way’s decreased, according to data compiled by Bloomberg. The less-than-truckload business, which relies on a healthy U.S. economy for its success, is concentrated among the top providers, with the 10 biggest carriers accounting for about 67 percent of the $33 billion U.S. and Canadian market, the data show.

YRC has about $1.3 billion of indebtedness, an amount that will increase because YRC is incurring new debt to pay some of its interest, the filing showed. Most of the company’s debt matures in 2014 and 2015. Its enterprise value, the sum of its stock-market capitalization and net debt was $1.22 billion on March 16, down from $4.09 billion at the end of 2005. Its aggregate equity price has declined to $65.7 million from $2.56 billion.

‘Operational Story’

“Since the company’s finalization of its last restructuring of July 2011, there’s been significant management changes to focus on the company’s operations,” Iain Gold, the Teamsters union’s director of strategic research and campaigns, said. “This is an operational story that, given time, markets will reflect more accurately the value of the company.”

The company is divesting assets and resources not related to its core less-than-truckload business -- in which it hauls goods for more than one customer in the same trailer -- in North America, according to Pierson’s statement. It sold some of the assets from its Glen Moore truckload operating subsidiary to Celadon Trucking Services Inc., in said on Dec. 15.

New Management

In July, James Welch took over as CEO and a new board of directors was installed, with James Hoffman, former president of Alliant Energy Resources, acting as chairman. Michelle Russell was appointed general counsel and secretary this year.

YRC said it appointed Pierson as CFO in November. He previously was a managing director at Alvarez & Marsal North America LLC, where he focused on out-of-court restructurings and senior management advisory.

“The restructuring gave them time, but they certainly weren’t out of the woods,” said Berge of Moody’s, which has assigned YRC a corporate family rating of Caa3, the lowest rung of a category considered to be of poor standing and high credit risk. “Last time around they were reliant on a couple of transactions being successfully completed. Now they’re reliant on the market cooperating with them.”

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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