Arkansas Best Competitor On Financial Ropes

A recent report from Fitch Ratings suggests a lawsuit filed by Fort Smith-based ABF Freight System holds the potential to bankrupt financially-troubled YRCW — the largest less-than-truckload carrier in the U.S. and ABF’s primary competitor.

On Nov. 1, the management at Fort Smith-based Arkansas Best Corp. decided to seek up to $750 million in financial damages from alleged violations of a National Master Freight Agreement (NMFA) by the International Brotherhood of Teamsters and others. The lawsuit was dismissed Dec. 16 by U.S. District Court Judge Susan Webber Wright, and the company on Jan. 19 filed an appeal with the U.S. Court of Appeals in St. Louis.

The NMFA, implemented April 1, 2008, was designed to cause equal labor costs and other benefit payments among trucking companies with drivers represented by the Teamsters.

YRC Worldwide, the largest less-than-truckload carrier in the U.S., received three rounds of wage and benefit concessions from the Teamsters, with the most recent concession announced Nov. 1 that includes up to $350 million annually through 2013. Previously, the Teamsters voted to approve a 15% pay cut among unionized YRC drivers.

ABF, the largest subsidiary of Arkansas Best and a less-than-truckload carrier that competes with YRC, was unable to obtain similar concessions from the Teamsters.

Overland Park, Kan.-based YRC narrowly avoided bankruptcy in January 2010 through a complex bond swap agreement with creditors. The less-than-truckload company had piled up a mountain of debt with the $1.07 billion acquisition of Roadway Corp. in 2003 and the $1.23 billion acquisition of USF Corp. in 2005.

In August 2010, Teamsters leaders — including James Hoffa — suggested that ABF buy YRC. Arkansas Best officials claimed that after they rejected the YRC purchase proposal the Teamsters refused to pursue a wage agreement.

“When we communicated our reluctance to pursue such a transaction, TNFINC (Teamsters) representatives advised that the IBT would be unwilling to work with us, going forward, after YRC’s deal was ratified by its employees,” Arkansas Best noted.

In a credit rating issued Feb. 11, Fitch Ratings placed a “CC” rating, or “highly vulnerable,” on YRC’s overall financial position.

The situation is bleak. YRC ended 2010 with almost $1.5 billion in debt and obligations, yet generated full year cash flow of only $1.1 million.

“YRCW’s ratings reflect the significant risk still present in the trucking company’s credit profile, despite improving business conditions and increased traction on cost savings,” Fitch noted in the report. “Fitch believes the company will need a combination of increased volumes, higher freight yields and reduced operating expenses to generate sufficient free cash flow to avoid a liquidity squeeze in the next 12 to 18 months.”

The squeeze could also come from an ABF legal victory. According to Fitch: “Although the ultimate outcome is unclear, if ABF is successful in both nullifying YRCW’s contract concessions with the IBT and receiving the $750 million damage award, Fitch believes the likelihood of YRCW filing for Chapter 11 bankruptcy protection is high."

Also, YRC faces a critical Feb. 28 deadline to qualify for debt restructuring or some other “qualifying transaction” as part of an agreement with the Teamsters. The qualifying transaction must be in place by March 15.

“Unless all of the relevant parties, including the company, its bank group and the IBT, agree to a revision of the timeline, missing these dates would nullify the various agreements and likely force the company into bankruptcy,” Fitch noted.

Michael Tilley with our content partner, The City Wire, is the author of this article. He can be reached by e-mail at [email protected].