It wants to know: Why was YRC even bailed out? And why was the taxpayer put at so much risk? What’s going on here?
By Wolf Richter for WOLF STREET.
The US government’s $700-million bailout under the CARES Act of long-troubled YRC Worldwide, one of the largest less-than-truckload (LTL) carriers, has come under fire by the Congressional Oversight Commission, which is supposed to monitor how the trillions of bailout dollars are getting distributed.
The bailout gave the government a 29.6% stake in YRC in lieu of higher market-based interest rates on the loan. That trade-off also came under fire, given the iffy fate of the shares in an eventual restructuring of YRC.
Let’s put something straight first: All bailouts are primarily a bailout of stockholders and bondholders. That was the case in the YRC bailout as well. In the 10 trading days straddling the bailout announcement on July 1 and its finalization on July 8, YRC’s shares [YRCW] soared 122%, from $1.57 on June 25 to $3.49 on July 10.
The company has been wrapped up in a tangle of problems for years. It has been junk-rated for over a decade. Moody’s rates it Caa1 and S&P CCC+, both deep-junk (my cheat sheet for corporate credit ratings). Its shares have collapsed starting in January 2018, from a range of $12-$18 a share to $2.57 at the beginning of 2020, pre-Covid. Shareholders weren’t exactly brimming with hope, when the pandemic hit the trucking business.
Why was YRC even bailed out, the Commission wants to know.
Two of the Treasury Department’s criteria for a bailout are based on “maintaining national security” – that the company must either be performing under a defense contract of the highest national priority or operating under a top-secret facility security clearance. But the Commission’s report said that YRC didn’t qualify, obviously, under those two criteria.
Instead, YRC qualified “under a catch-all provision created by the Treasury allowing it to determine if a business is critical to maintaining national security based solely on a recommendation and certification from the Secretary of Defense or the Director of National Intelligence.”
And the Commission now “has questions about the decision to deem YRC a business critical to maintaining national security and the process for reaching that conclusion.”
“Secretary Mnuchin has publicly stated that the national security loan program was developed with the thought that Boeing and General Electric might need loans. Given the types of sophisticated services and products these two companies provide for our national defense, it is not hard to argue that they are critical to maintaining national security.”
“It is far from clear that the fourth-largest LTL shipping company in the United States is critical to maintaining national defense because it reportedly delivers ‘food, electronics and other supplies to military locations around the country.’”
And why were taxpayers put at so much risk, it wants to know.
“The risk of loss of U.S. taxpayer money on this loan appears high. In fact, the Commission notes that the level of risk taken in the loan to YRC appears strikingly higher than the risks associated with the other facilities over which the Commission has oversight.”
“YRC has been rated non-investment grade for over a decade, struggled financially for years before the COVID-19 crisis, and was at risk of bankruptcy before it obtained a loan from the Treasury.”
“Under the CARES Act, a Treasury loan like this one is supposed to be ‘sufficiently secured’ or ‘made at a rate’ that ‘reflects the risk of the loan’ and ‘is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of the coronavirus disease 2019 (COVID–19).’”
“It is questionable whether the loan to YRC meets these standards. The interest rate on YRC’s loan from the Treasury is 4% lower than the interest rate on the company’s most recent debt financing, which was a five-year, $600 million term loan that YRC obtained in September 2019 before the COVID-19 crisis.”
“As part of the loan agreement, the Treasury has obtained a 29.6% equity stake in YRC to reportedly provide ‘appropriate taxpayer compensation’ for the loan. But given the company’s long-term non-investment grade rating and previous close calls with bankruptcy over the years, it is not clear that an equity stake in YRC will provide much, if any, compensation or protection to taxpayers.”
“This loan may indicate that the Treasury believes the national security designation permits a much higher risk tolerance to provide relief to firms that were struggling well before the COVID-19 pandemic.”
“If that is the case, the Commission would like to better understand the rationale for this risk tolerance, especially in light of the statutory restrictions on national security loan terms and the fact that the single such loan the Treasury has made – to date – is to a company that may not be critical to maintaining national security.”
An alternative to a taxpayer bailout.
A debt restructuring in a Chapter 11 bankruptcy proceeding could ensure that a nimble company with a much smaller debt load emerges at the other end – and that’s a long-term benefit to its customers and the economy.
In a Chapter 11 bankruptcy, in essence, creditors take over the company. Still some creditors would come up short. Shareholders often get wiped out, after having already been nearly wiped out over the years due to the declines in the share price. And other stake holders, such as the company’s pension fund that often had been raided over the prior years, would also get hit.
So in the case of YRC, shareholders, creditors, and other stakeholders were bailed out by taxpayers, temporarily. YRC now has $700 million in additional liquidity it can burn through, but then what? It will have an additional $700 million in debt, on top of the debts it already has been struggling with, and it still hasn’t restructured its business and may eventually buckle under all this debt anyway, and head for a restructuring, and then taxpayers can kiss their investment goodbye.
Was June as Good as It’s Going to Get for Freight Shipments in the Pandemic Era? Read… “Uneven” Freight Recovery after New Covid Outbreaks: Daily Truck Trips Already Fell 10% Since June 25
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I remember YRC going public originally – it was around the Y2K bubble.
Can’t imagine a less worthy target of bailout.
who got paid in this deal? who approved this/ follow the money trail
The Grift Engine works it’s churn in mysteriously consistent ways ..
No matter who the Bizz, no matter what the Gov .. the reacharounds Still must, and ARE maintained.
Down the Chulthu’s chute we go!
surely United and American are better risks – NOT
congress has to take care of it’s own(1% donators)
How much of this was not wanting to pile 35,000 more onto the ranks of the unemployed in an election year?
they got bailed out to cover the pensions of those YRC and Roadway employees. There are thousands of them. Union pensions just got saved big time. They also move a ton of freight. 65000 bills a day up to 85000 bills in the good times.
they are the 4th largest carrier in the nation. If they go down…. expect the cost of everything to go up. All the executives at the carriers I work with won’t even move the freight YRC moves. They move the garbage freight of the nation. Volumetric stuff like Lighting and toys and Walmart type stuff.
“They move the garbage freight of the nation. Volumetric stuff like Lighting and toys and Walmart type stuff.”
Useful info…how about more insight into why this area is less profitable and what other categories of freight are.
LTL freight is determined by the NMFC or the National Motor Freight Classification. Rated as a class from 50 up to 500. The NMFC determines this class using four characteristics: Density, Stowability, Handling, and Liability. So a company like ODFL or R&L moves alot of 50-125 and with that stays very profitable. YRC not so much.
Cas,
To answer your Q re why less profitable I will repeat what I was told many years ago: It’s the handling of the LTL that makes it more costly/less profitable. As P says, a lot of this tonnage is made up of smaller items that, even though usually palleted these days, must still be ”managed” (personnaged??) more at each and every junction/loading/unloading/reloading, etc., etc.
Other categories, in general, are full truckloads to one destination, even if the trailer part get’s dropped more than once one the way, it is still just hook up and drive vs the unpacking and repacking with LTL…
Somewhat similar and likely based on the charges for freight on the railroads that used to be the only way to go across country, and IMO should once again be the vast majority of freight carried, as the cost per ton mile on the trains is waaay lower.
A memory of sending a trunk of all my earthly possessions that I could not carry in my backpack from FL to CA, 1966: took six months, but arrived safely, with at least a dozen different ”tags” attached.
volumetric freight is stuff that weighs very little …freight is normally paid by the ton .if you ship iron …it leaves room on the truck for other freight to add to profit ..if it is full of foam then truck runs at less income for the same journey …the reason U P S has a 108 inch rule ….H x W x L ,,=< 108 inches per package ..
“bailed out to cover the pensions…”. It is a safe bet that if they are Junk rated the pension has already been gutted (if private equity ever involved) or at least is underfunded. If the goal ever was to protect the pensions, they could simply have payed off the pensioners and let the stock and bond holders take the loss.
Would you care to make a bet that sometime in the near future the workers and pensioners get shafted?
It would have been cheaper and more sensible for the government to takeover the pension (yes, inject capital into the federal pension corp) and put YRC in receivership. If YRC has to pay back the loan, I don’t see how they will be profitable.
So, why couldn’t YRC’s functions be taken over by the Post Office? If they are good enough to handle tax filings, why not cans of beans and bullets?
The great majority of USPS shipping is done by contractors.
Cash for Clunkers.
If YRC had reefers, which they don’t, the taxcows could use them to store all of the corpses from Fauci’s Folly and clean up the stinking and bloating bodies from the hospital parking lots.
Oh, you don’t have that, never mind.
Free the mortuaries.
Wow, the military must have shrunk quite a bit if they get those supplies at less-than-truckload these days. Maybe these “national defense” rated guys are moving all that freshly printed money. The way it’s going, they’ll need to shift to full rail carload measurements. LTL won’t cut it much longer.
YRC is the subject of buyout rumors. In business since 1924. National security may be a misdirection, they have assets, but in this economy they are more likely to get strip mined than acquired outright. Calling Fedex and UPS LTL is a misnomer. They aren’t going to deliver a pallet of fabricated metal parts for instance. They are lightweights in a heavy haul business. About time we bailed out a few blue collar folks.
Minor correction: Fedex is a major player in the LTL space. UPS, not so much.
Either way, this bailout is odd. There are plenty of others to pick up the slack if YRC disappears.
Fedex was chosen by our customer for shipping of finished steel plates. If they are scratched or worse they are unusable. Fedex were butchers ruining entire stacks of them. Before that there was a company that did well but was bought out by Yellow.
Now we use a very reputable company that ships to the Mexican border without any difficulty. Pricing is good and the drivers are fun to talk to when loading. Talking with drivers gives one a better sense of what is going on than some three month old gooberment survey.
I have made business decisions based on short talks with the drivers.
FedEx Freight is a totally different business than FedEx Ground (packages). Also UPS Freight again is a different business than UPS Ground (packages).
Both FXF and UPSF are both large LTL companies. In fact FXF is the #1 LTL carrier in the US. (UPSF is #5).
What got bailed out where stockholders and bondholders, not workers. In a good Chapter 11 restructuring of a company with a good business model (LTL carrier), the company is able to emerge stronger and better and not burdened with debt.
The goods still need to be hauled. There still need to be drivers and trucks to do the hauling, along with all the people to make it work.
Except of course pensions and benefits, which all get tossed under the bus. We should save a few of these guys, put em in the trucking museum.
I never understood why pensions weren’t held by a separate corporate entity, so that they would be shielded in the case of bankruptcy or takeover.
MarMar
Pensions are generally in a separate legal entity and managed by (reasonably?) independent trustees.
The financial problem is the pension fund is probably massively underfunded, and YRC is in such bad shape it can’t make current payments, let alone catch-up payments.
Personal history re pensions:
[1]1980 in maintenance trades [unionized] got new job at major corp. Year later realize all company contributions toward my pension go to a personal account in my name at Bankers Life, a major fiduciary institution… and I can claim balance any time I leave my employer regardless my age. Never heard of that kind of pension arrangement, so I inquire “Wow! How come? ”.
Shop steward explains that few years earlier, the co. and union were caught in some big scandal and would settle potential lawsuit with members [only at that plant in that union local] if the co. gave that union’s members the “supervisors” pension arrangements. BTW, overall an excellent employer with great emplyee relations…a giant bought-out recently by another giant.
[2] 60+ years ago a man came home from a “board-meeting” and told his wife [I paraphrase]:
[in a surprised tone…] “They [new group who recently bought control] are going to layoff all the employees and end manufacturing. They will take the [employee] pension funds to use for their other corporate purposes. Those [100s] currently receiving pensions will be cut off. Those [many 100s] not yet retired will get nothing.”
[ I was in the room listening to this! Thought it wierd a company could take its employee pension fund and end all pensions….just like that.]
There was a pause. Then my mother calmly stated, “X, you have to do somethong. You cannot let them do that to the employees”. I think he mumbled a few words about it being completely legal and “they” can get away with it because other companies have done it, too, then he went silent. So did she. I was confused, almost stunned.That’s all I can recall.
Days or week later, he announcd that “they” agreed to reduce existing retirees’ amounts and allow some compensation to those employees who were close to retirement. And so it was done.
A few years later began the ERISA legislation [Employee Retirement Income Security Act] that became law early 1970s.]
So yeah, American corporate pensions have an awkward history.
The government could have easily done a structured bankruptcy with YRC to save the jobs and operations, while shedding debt and shareholders, just like they did with Good GM, Bad GM during the GFC.
During the Gold Standard era, structured bankruptcies was the MO. The myth they just liquidated and them came back to life always cracks me up. Its what should have been done in 2008.
Follow the money? Favors being exchanged?
Sorry, naively speculative…
lenert, don’t you really mean “cash for executives”?
…with a bunch of beat-up old trailers.
Off Topic: Wolf will you being doing any coverage of Judy Shelton’s appointment to the Fed? Her affinity for the gold standard carries huge implications.
She’s backed off from her gold standard stance. She needs to be confirmed after all, but even after that it’s unclear what her real stance is.
Both conservatives and liberals would go crazy every time a “conservative” or “liberal” gets appointed to the Supreme Court, but in practice, there’s times when a liberal would vote conservative and vice versa.
ThePetabyte,
She threw her “affinity for the gold standard” in the trash the minute she came under consideration for the Fed because there was no way the Senate would ever confirm someone wanting any kind of gold standard. Not happening. Tells you how this world works.
Before the actual (significant) headline inflation, appears, inflation ‘EXPECTATION’ rides in front and first!
IMHO there is disinflation or deflation (except in stocks, bonds, housing,education and healthcare) evolving. With Trillions & Trillions out by Fed and CBers everyday if not every other week, there is strong perception going around about ‘possible’ inflation just around the corner ( I doubt this, just like Mike S, -mishtalk)
But look at the chart of gold ETF – GLD. It has gained just over 18% year to date, at 52 week high! Just today it shot over $ 24 to 1840+
Same thing with gold miners (GDX++) and also silver.
Been in the mkt since ’82. Never appreciated this concept of inflation ‘expectation’ more than the inflation itself, until now!
Matters little since I am riding with Fed ( Corp credit ETF bonds) for possible DEFLATION ahead ( 10y yield 0.602%) and at the same time
riding along ‘inflation’ expectation with various gold/Silver(+Mining) ETFs . GLD gets sold off periodically. But I am betting on inflation ‘expectation’ until Fed stop their creating digital $, out of thin air!
It’s funny how there’s one guy on here always talking about how he got out of the market for good in ’82, and you’re always talking about having been in the market since ’82. You guys are like polar opposites.
WTF happened in ’82 anyway?!?
Zantetsu, that was the 18+% mortgage boom time. And high inflation. And 12+% CD’s. Some people thought it was “good times” and some thought “otherwise”.
St Louis Cardinals won the 1982 World Series
Nothing happened except by chance( young and just started some ‘real’ money!) I started investing at the bottom of beginning bull mkt of late 20th century! Rode all the way to 2000. Retired about 15 yrs ago.
Trading is a hobby which I enjoy along with voracious reading. BTW !0 y was around 14-15%! NOW 0.602%. Tactical trading ( a modified swing trading) using options and also leveraged (short/long) ETFs(NOT for the novice!) Most of trading is in my IRAs!
Although it is true that I got out of SM in early 1980 era, I only put it in here to balance out the sun guy! Just for the fun, eh?
All joking aside, it was when I realized, after 30 some years of being coached by elders, that I had never made any ”real” money in the SM, so I switched, and made money on all but one RE ‘investment’ after that, mostly through ”sweat equity” doing full rehabs on fixer uppers, building from scratch a couple of times, etc..
Now full retired and enjoying my ”liquidity” positions in spite of the heat, humidity, and humanity…
The Gold Standard would destroy capitalism. Especially with all the low hanging fruit gone. Its very good at pumping up bubbles. Maybe in some respects, better than fiat dollars.
The problem is this time is, the government couldn’t bail out the system and it would collapse. Anti-Capitalism would revive quickly.
The entire Industrial Revolution and then several stages of the electric and communications revolution, from horse drawn plows to the DC 3, happened under a gold standard.
DC 3 refers to the groundbreaking aircraft introduced by Douglas in 1936.
It depends on how a gold standard was implemented. The U.S. supposedly has the worlds most gold in storage, so that backing is not a determent to the dollar. With the most gold, the U.S. could also price precious metals much higher, say gold at $5,000. By pricing gold, I mean a standing offer to pay $5,000 in paper dollars per oz. The most gold and strongest military would keep the dollar solvent.
@Brant Lee
You do realise that even at the current high price of gold the value of the gold held by the US government is not even $500 Billion. So when the fed continues to pump out and create literally Trillions of Dollars out of thin air just how much value does the gold have in backing it up? Virtually nothing in the real world.
‘Gold Standard would destroy capitalism’
Yeh, destroys the current CRONY or Shareholder capitalism but NOT the the good ole, genuine Free Mkt American Capitalism, before it was put to death by Fed in March of ’09!
Been investing since ’82 and well aware and known TRUE ‘capitalism’, where the PRICE discovery was allowed. NOT the phony kind where profits are privatized and debts are socialized. Covid 19 is just the pin to bring the current bubble pop. I am all for it and prepared!
GOLD standard will demand FISCAL discipline in spending which NO politician wants! But the price of gold and silver ({mining stocks keep going up!)
@Bobby
When was the last time we had capitalism? The current system is socialism for the rich and capitalism for everyone else.
The gold standard is actually capitalism.
A real riot to see an advertisement of Bill O’Reilly and Alexander Green on ultra-cheap stocks re-ignition the Stock market on your site here.
Yeah, I love my advertisers — from “bras for busty women” to “investment deals of a lifetime.” They keep this site free and open to all.
And advertising revenues industry-wide have gotten hit hard during the crisis, including mine, so I love the advertisers I do have even more ?
That’s all the boom and bust talk training the AI.
The widened Panama Canal container traffic bypasses the heartland.
Old hat, put on the wrong way. The widened Panama Canal began commercial operation in July 2016. The peak in US trucking was in 2018.
To be clear, under a different program they paying Blackrock
to bail-out its own Junk bond fund. Backed by hundreds of billions of taxpayer money. All set to be deployed if/when needed.
HYT – Black Rock’s own High yield bond. (div/yield over 8%)
One of my favorite since April and it is still growing strong, thanks Fed’s put!
Checkout it’s chart. Don’t know when this ride will be over. I have bought credit and high yield bonds from Black Rock and others. They are holding up, so far!
Checked the holdings and there’s no Yellow freight. But you raise a good point – what about the equity funds? What about the personal positions of managers, directors, employees of BlackRock dot com? Usually it’s an offshore account in the wife’s name or something – anyone check that?
I am only interested in their trading/investing products, to ride along since US GOVT has picked it as their investment ‘advisor’!?
AS of today virtually ALL any kind of Corp Credit bond-ETFs are on the upside run! Even the high yield (HYG) and junk bonds(JNK, SJNK++) like fallen angels – FALN!
You have got to be kidding me!! Didn’t they buy Roadway not too long ago and now they need a bailout. I guess the taxpayer gets screwed again trying to keep a dead company afloat as well as their bloated pension.
J. Shelton rolled over on gold before she was asked. She de-nounced gold as a heathen Keynesian barbarous relic and made her own re-education camp and self propagandized . Stalin would blush. YRC is interesting because of the small amount. Someone thought no one would notice the slop trough was a little watery. Unless it serves a political purpose it’s a dead issue. Political system can’t correct something it created for its private en-richment.
“Its shares have collapsed starting in January 2018, from a range of $12-$18 a share to $2.57 at the beginning of 2020, per-Covid.”
I think you meant “pre-Covid” since per-Covid would make it sound like Covid caused the drop.
Yes.Thanks ;-]
Back in the early 90’s when I had a manufacturing company that made industrial fume and dust collectors these were all separate thriving trucking companies. I had freight accounts with discounts on Yellow, Roadway, and Reddaway. The salespersons would visit weekly and compete to see who could bring the best trinkets. The consolidation started right after the dot com bust and never stopped. I think this isn’t just about janky finance ,but about the decline of small and medium scale manufacturing in America. Now the big boys ( Walmart, Amazon etc) haul imported junk from the docks with their own trucks, or full truck load contract trucks. Covid-19 is just kicking off the economic beat-down we have long deserved for thinking we could make an economy out of ironing each others shirts.
Well I’m grateful. Made money over 2 years now with YRC dips. Friend of mine purchased large tract that YRC has a long term lease. He purchased at a major discount on psqft basis but based off the lease it was less than 3% cap rate.
He told me they will go bankrupt. So I started to track YRC. Then I started to join the roulette table and got caught out in March but bounced back got out. And then came back to play at the table placed my chips on $1.60 figured I can get away with some change. It spiked and I said hey what’s going on here??? Held on a little longer woke up it was over $3.25!!! Sell Mortimer sell!!
Could we be seeing the nationalization of certain industries, like trucking. If YRC cannot repay the money, the US government could take 30% of the company, right?
Tom,
More likely, if YRC cannot service its debts, it will file for bankruptcy and restructure its debts in bankruptcy court, and shareholders, including the US government, will be the bag-holders and get wiped out.
But the US gov also being a creditor due the $700 million loan, it has a seat at the table in bankruptcy court, and might get a slice of the newly restructured company in return for giving up part or all of its claims under the loan.
Wolf,
Having driven cross USA 10 times since spring of 2016, and planning to go again ASAP, ”A.C.” I certainly hope not.
IMO, WE the PEEDONs must insist that the vast majority of the big trucks be taken off our Interstate Highway System, and, literally, be beaten into train cars to do the same work, or at least approximately 90% of it.
Not only do the big trucks beat the hell out of the roadways, they are extremely dangerous both to smaller vehicles, but also to their drivers.
All the long haul semi drivers I have known, each and everyone of them, have suffered badly from the long hours, the constant and heavy physical abuse from the shaking, etc., of the trucks, and, in most cases the really bad sleeping and eating habits that result from the pressures of driving, leading to substance abuse, etc., etc.
Other than that, I agree that the renewal of small and medium manufacturing, the lack of which has certainly added immensely to this current situation is where the encouragement and support should be aimed, at least to the extent of USA not being at the mercy of any other nation/country for the basic requirements of life.
You are asking to enter a time machine. The stuff you bought yesterday was delivered by truck not by train because trains can only go where there are rails.
I don’t like trucks either. I just want the stuff in them and I don’t want to go to the train’s yard to pick them up.
An apparent ineligible company gets bailout provisions under CARES, including a ZIRP loan with risk terms unfavorable to tax payers, stake in lieu of interest where risk is usually transferred, something is definitely off and in need of further explanation.
Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth: One can’t help but consider the possibility of political fallout from the Epstein/Maxwell/Mossad scandal being one of many material factors in such inexplicable cases like this one.
Uh..maybe. Or to apply Occam’s Razor, maybe someone knew someone, who they thought would do them a favor in return.
YRC has been a Zombie company for years as you say. Somebody would pick up the pieces. They need to let this one sink