YRC Teamsters OK Contract; LTL Seeks Financial Package

This story appears in the Feb. 3 print edition of Transport Topics.

Members of the Teamsters union employed at YRC Worldwide Inc. approved a contract extension into 2019, moving the carrier toward long-term survival with a continued 15% wage reduction and expected lower debt costs.

After last week’s extension’s approval by a 2-1 margin, YRC said it was meeting with lenders in hopes of nailing down $1.15 billion in new financing, which was contingent on the contract extension’s approval. As of Jan. 27, YRC had $1.4 billion in debt, before finalizing $300 million in debt reductions.

YRC hasn’t achieved quarterly net income from its operations in six years, though losses have been narrowing since 2011. CEO James Welch said the union’s agreement to work four more years at current wages, plus lower interest rates on the remaining debt, would go far toward turning the company’s fortunes around.

“We took another significant step toward providing our employees the job security they deserve while providing our prospective lenders and equity investors the path they need,” Welch said.

Analysts agreed the contract and financing steps were significant.

“The company now has a long runway to manage its business for profitability,” Satish Jindel, who heads SJ Consulting, told Transport Topics. “There won’t be any shutdowns at YRC.”

“We expect the company’s previously announced refinancing arrangements will now be implemented, and thus believe YRCW faces very little near-term bankruptcy risk,” said a report from Edward Wolfe of Wolfe Trahan.

Teamsters who have been working more than three years at reduced wages will receive a $750 lump-sum payment and future wage increases. The deal was reworked after an initial Jan. 9 rejection to extend pay increases to dock, clerical and maintenance workers who were excluded in the tentative agreement that was rejected.

YRC last week said labor-related savings would raise adjusted earnings before depreciation and amortization (EBITDA) by $100 million annually in 2014, assuming that the financing is completed. YRC expects to report adjusted EBITDA of between $250 million and $260 million for 2013.

YRC hasn’t disclosed interest rates for new debt or specified interest cost savings. YRC did not respond to that question when it was asked by TT.

The carrier’s first batch of debt, $69 million, comes due this month, with an additional $326 million maturing later this year. There are other maturities totaling more than $956 million next year. YRC’s cash resources as of Sept. 30 were $170.5 million.

An anonymously sourced Bloomberg News report said the company arranged $700 million in term loan financing, with an effective current interest rate of about 7%. The other $450 million in debt would be an asset-backed loan facility.

Analysts also identified long-term issues that still must be addressed, particularly continued losses at YRC’s national unit with $15.8 million losses in nine months of last year before taxes and interest. The regional unit’s profit was $57.2 million.

“YRC can’t simply be chasing low-priced business to fill their trucks,” Jindel said. “They have to be out there picking up profitable freight.” Welch can encourage that by continuing to “win the hearts of employees,” Jindel said, as he has in the past two years. Welch rejoined the company in 2011 when former CEO William Zollars retired.

Deutsche Bank analyst Justin Yagerman said in a report that positive factors last week were better-than-expected cost savings, along with better tonnage and pricing. However, there are still challenges because share value will be diluted by the issuance of new stock as a result of the $300 million refinancing.

Other competitors still have multiple advantages.

Four large LTL operators — Con-way Inc., Old Dominion Freight, Arkansas Best Corp. and Saia Inc. —combined have about the same amount of debt as YRC, but their results exceeded YRC’s through the first nine months of 2013.

Over the three quarters, their combined income before interest and taxes totaled almost $450 million. YRC reported just $30 million in profit when those costs were excluded. Revenue at the competitors was about 70% higher than YRC’s $3.66 billion. Competitors’ interest costs on loans are as little as 1% currently.

“We continue to believe [YRC] faces long-term structural cost disadvantages and share losses as a longhaul unionized carrier,” Wolfe’s report said.

Wolfe said YRC’s steps will turn Wall Street’s attention to industry freight fundamentals, where pricing has been weak.

Jindel also believes YRC’s survival actually will help pricing by keeping a floor on rates.

“The competition isn’t going to easily pick up the business YRC has,” he said. “The competition should welcome this development at YRC because it will provide pricing stability in the entire industry.”

“We will hold management’s feet to the fire to make sure our members’ jobs are protected,” Teamsters General President Jim Hoffa said in a statement.