YRC Increases Liquidity with Debt-for-Equity Swap

This story appears in the Jan. 11 print edition of Transport Topics.

YRC Worldwide Inc. said it has successfully completed a debt-for-equity exchange that company officials and analysts said would give the carrier financial breathing room as it tries to overcome persistent losses.

After six extensions of the deadline for exchanging debt for equity, officials of the less-than-truckload carrier said Dec. 31 it had won sufficient support from note holders to make the swap, wiping out about $500 million in debt. YRC also gained access to $160 million in operating cash and it was able to defer about

$100 million in interest payments due in the 2009 fourth quarter and all of 2010.

“The success of this note exchange marks a major turning point for YRC Worldwide,” Bill Zollars, chief executive officer, said in a statement.

“With our significantly restructured balance sheet and enhanced liquidity, we will move forward from a more solid financial foundation,” he said.

YRC, which has lost $1.71 billion since 2008 began, had said that its financial position would be unsustainable unless the swap was approved.

A total of 88% of note holders agreed to swap their debt for stock, including 70% of those holding $150 million due in April 2010 and 94% of those holding $386.8 million due in 2023. Earlier in December, as few as 53% of note holders were willing to make the swap.

Zollars told Bloomberg News that a group of banks and investors, including Deutsche Bank AG and Goldman Sachs Group Inc., “got us over the goal line” to reach the required tender of 70% of the 2010 notes and 85% of the 2023 notes.

Zollars also told news services on Jan. 6 that customers were returning “pretty aggressively” following the successful exchange, without giving details.

Analyst Ed Wolfe on Jan. 7 released his survey of 115 YRC customers done after the swap. The survey found about 20% planned to boost freight levels with the carrier, but more than 40% would keep diverting cargo elsewhere.

Although most of the notes were swapped, YRC still must come up with $45 million to pay off the 30% of holders who didn’t tender notes that mature in April, analysts said.

“YRC Worldwide also will have to raise new capital to pay off the holdouts,” said Jason Seidl, a Dahlman Rose analyst. He said YRC probably would have to issue more shares because its $1 billion debt load makes it difficult to raise money by issuing unsecured debt.

The company declined to comment on how the company would pay the holders of the 2010 notes who didn’t tender them.

As a result of the swap, the corporation’s structure will change, with note holders controlling 94% of the company’s stock, YRC said on Dec. 31.

A special shareholders meeting is planned to consider approving a reverse stock split and to elect eight new directors. The meeting date hasn’t been announced, and the identities of the new director candidates haven’t yet been disclosed. YRC has nine directors now, including Zollars, who is the only member of YRC management on the board.

The debt-equity swap is the latest in a series of survival steps YRC has taken since its fortunes worsened in 2008. Last year, wages were slashed 15% or more for all workers, pension contributions were halted, thousands of employees were laid off and hundreds of terminals were consolidated.

Analysts warned that more challenges lie ahead.

“Now that they have this longer leash from the banks and the union, starting today, it is time for all the management, including top executives, to be on the street calling on customers,” Satish Jindel, principal of SJ Consulting, said, stressing the need to boost revenue and margins. “If they don’t show progress in the next 60 days, they will lose momentum.”

Analyst Jon Langenfeld with Robert W. Baird & Co. Inc. said an “uphill battle remains” to stem market share and operating losses, pay non-tendering note holders and resolve issues with some Teamsters who haven’t agreed to wage and benefit cuts.

“Although the company has a new lease on life, it still needs to address their underlying problem of bleeding cash,” Seidl said. “This will not be easy, with both challenging economic conditions and a very competitive LTL marketplace.”

YRC’s survival also shifts the landscape for the entire LTL market, Jindel said.

“The Christmas present [a YRC bankruptcy] didn’t come for the other LTL carriers,” Jindel said. “They need to do their part in taking capacity out, and not just rely on one carrier to do that for them.”

The entire LTL industry needs to focus on reducing capacity and follow the lead of the railroads that preserved their pricing power last year by parking thousands of locomotives and freight cars and laying off workers, Jindel said.

LTL operators also should focus on finding new ways to attract freight because their industry has grown at just a 2% annual rate since 1983 while parcel business grew at 9% a year, said Jindel.