YRC thrown lifeline by lenders

YRC Worldwide Inc.'s lenders threw the troubled trucker an extraordinary financial lifeline last week, a move that will likely keep YRC viable through 2010 but will squash any efforts by the less-than-truckload (LTL) industry to push meaningful rate increases into a marketplace already saddled with excess capacity.

Under the agreement, YRC's bondholders agreed to exchange $530 million of debt for YRC equity. Once that is completed—and the deal is contingent upon the exchange of 95 percent of the debt's principal—YRC will have access to $106 million in an existing revolving line of credit that can be used to support operations.

In addition, a cluster of interest expenses and fees have been deferred until the fourth quarter of 2010 or even longer. For example, YRC's quarterly interest expense and fee payments associated with its bank credit agreement—which costs the company a combined $20 million a quarter—will be deferred until the end of 2011 as long as two-thirds of its lenders approve the extension.

A successful debt-for-equity swap would eliminate $386 million in 2010 principal payments facing YRC, said Jon A. Langenfeld, transport analyst for Robert W. Baird & Co., in a research note. Langenfeld said he no longer expects YRC to file for bankruptcy protection in the second half of next year. He added that the recent financial steps "provide enough near-term flexibility and access to liquidity" for the company to avoid bankruptcy in the foreseeable future. However, the analyst said he continues to have a price target of $0 for YRC stock, saying there is no equity value left in the business.

Thomas R. Wadewitz, analyst for JPMorgan Chase, said the agreement offers "meaningful new concessions" from YRC's lenders and that the deal is "very favorable" for the company. However, he cautioned that YRC cannot fully realize the benefits of the deal without first executing a successful debt-for-equity exchange.

As YRC gains time and much-needed capital, its rivals must now confront the reality that they are unlikely to see a firming of rates as long as the largest player—with 15 percent of the market—remains in business. The industry is plagued by as much as 20 percent excess capacity, and YRC's continued presence dims the chance of significant space coming off the road any time soon, according to analysts.

Langenfeld said YRC's survival would "significant(ly) impact the LTL industry's pricing recovery," especially with such a large capacity overhang. And in the near term, carriers appear bent on undercutting each other to either win or preserve market share.

Recently, YRC announced discounts of up to 33 percent that will run at least through December, in an effort to hit back at rivals who have imposed their own price cuts to accelerate YRC's market share losses. This "pricing aggression is likely to weigh on LTL profitability into 2010," Langenfeld said.

Meanwhile, YRC continues to struggle with its day-to-day business. Daily shipments handled by its YRC National LTL unit in the third quarter fell nearly 40 percent year over year, while daily shipments moving on its regional system dropped 22.7 percent year over year, the company said on Oct. 30.