YRC, Banks Close to Deal on Debt Covenant Waiver

By Rip Watson, Senior Reporter

This story appears in the Feb. 16 print edition of Transport Topics.

CORAL GABLES, Fla. — YRC Worldwide Inc.’s chief financial officer said here Feb. 11 that the company expects to announce agreements “in the next several days” with lenders that will produce a waiver from debt covenant restrictions.

YRC has a Feb. 17 target date for completion of talks with its bankers about its debt covenants and asset-backed securitization agreements.

YRC was forced to renegotiate the debt covenants because its 2008 earnings before interest, taxes, depreciation and amortization — or EBITDA — failed to meet a required ratio to its debts, triggering the violation of those covenants and the need for a waiver.

Meanwhile, YRC is negotiating a separate agreement, due to end April 16, that covers securitization of its assets.

“We expect to have an announcement for you in mid-February — very soon,” said Tim Wicks, chief financial officer at the BB&T Transportation Services Conference. Speaking about the asset-backed securitization agreement, he said, “We expect we will announce that in the next several days, as well.”

Chief Executive Officer William Zollars sounded the same optimistic note.

“We don’t have to depend on the economy recovering to do well,” Zollars said. “We have the pieces in place to get ourselves back on track whenever the economy recovers.

“We will have a compelling story to tell,” he said. “We will be in the best possible position to compete.”

Edward Wolfe, who heads Wolfe Research, raised his rating on YRC to “peer perform” from “underperform” on Feb. 10, based on expectations that lenders would view YRC’s actions as “credible steps for bankers to hang their hats on if they desire to buy time rather than begin foreclosing.”

He said he expected that the announcement of an agreement would boost YRC’s stock price and could hurt shares of rivals.

YRC convinced lenders in January to continue talks about the waiver. The company’s loss last year was $974 million, and its EBITDA missed the limit that was based on 3.5 times its debt. The company managed to stay within that ratio through the first three quarters, but a drop in both tonnage and rates in the final three months led to an operating loss of about $100 million instead of profit that had been recorded in earlier periods, excluding charges.

After three quarters last year, operating income was $129 million.

Both Wicks and Zollars said their lenders are willing to negotiate changes because they have confidence in YRC’s ability to produce $500 million in annual profit improvement. That figure is based on integration of its Yellow Transportation and Roadway national less-than-truckload carriers.

A 10% wage cut by union workers at its national and regional units as well as cuts in nonunion pay and benefits will combine to make those improvements.

Based on $8 billion annual revenue, such a swing in profit would lower the operating ratio 6.25 percentage points. The national LTL operating ratio last year was 111.9, including charges to write down assets.

Zollars made clear that YRC isn’t seeing any improvement in the economy, though he said that early February operating statistics seem to suggest a trend of stabilization after a decline in tonnage in January.

The decline, which he estimated in the 15% range, was partly due to poor weather and customer losses that he attributed to uncertainty about financial agreements.

He said the ability to choose which freight to trim from its network has helped the company to keep its pricing “relatively flat” at a time when competitors are reducing their prices.

The integration also offers the opportunity to raise cash by selling assets and reduce the average age of the equipment fleet by retaining newer tractors and trailers.

The latest round of financial discussions follows multiple moves during the fourth quarter to lower its debt obligations as economic conditions worsened.

YRC used $335 million from its credit line to retire debt from the USF and Roadway acquisitions in 2005 and 2003, respectively. YRC was forced to pledge its rolling stock and facilities as collateral after its debt rating was cut by rating services, and the company canceled a tender offer that would have raised as much as $160 million in cash that would have helped meet its leverage ratio.

That offer was ended late in December because one of its conditions was a requirement that Teamsters workers approve the wage cut, which did not happen until January.