YRC bankruptcy watch continues; legal ruling critical

YRC, the nation’s largest less-than-truckload carrier, continues to teeter at the edge of bankruptcy — a bankruptcy that would significantly boost the business of Fort Smith-based ABF Freight System and other LTL carriers.

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 early March, YRC reached an agreement with its creditors and the International Brotherhood of Teamsters that essentially provide the lenders with equity share and convertible debt provisions that place regular shareholders at the back of the line in the event of a bankruptcy. Shares of YRC (NASDAQ: YRCW) have fallen from a post Oct. 1, 2010 stock split price of $5.39 to below $1. The stock was trading around 80 cents a share on Monday.

YRC officials said May 18 that the stock likely will be delisted when it follows through with the equity exchange offer as part of its restructuring deal.

MARKET OPINIONS
Trucking industry watchers have mixed thoughts on YRC survivability.

Fitch Ratings essentially believes the stars must all line up for the company to avoid bankruptcy.

“In addition to weak cash generation, risk is heightened by a relatively heavy debt burden, although this may be at least partially addressed with the proposed recapitalization transaction slated to occur in the next few months. In general, though, 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,” Fitch noted in a recent report.

Jack Waldo, a transportation sector analyst with Little Rock-based Stephens Inc., believes there is a “high degree of risk” for YRC, but is betting that YRC will survive.

“Essentially, without the concessions associated with the restructuring, YRCW’s financial position will not be strong enough to fulfill its obligations, thus forcing it to look for bankruptcy protection. Overall, though, we think YRCW will be successful in getting its financial restructuring done,” Waldo noted.

Waldo continues to estimate that a YRC bankruptcy could result in a boost of $76 million in annual net income for ABF.

Zacks Investment research was blunt in a recent assessment, telling potential investors that YRC is “gradually losing market share to its competitors” and issuing a “strong sell” rating on the stock.

ABF RESPONSE
David Humphrey, vice president of investor relations and corporate communications for Arkansas Best Corp., declined any direct comment on the YRC situation. He did note that conditions are improving. ABF Freight System is the largest subsidiary of Arkansas Best, and is one of the largest less-than-truckload carriers in the U.S.

Arkansas Best posted a loss of $12.8 million in the first quarter, an improvement over the $21.4 million loss during the first quarter of 2010. The transportation holding company, which employs about 9,500 nationwide, posted a 2010 net loss of $32.421 million, an improvement compared to a $127.522 million net loss in 2009. The 2009 income loss included a non-cash accounting charge of $64 million for the impairment of goodwill.

“Coming out of the challenging freight environment of the previous few years, we’ve had double-digit, year-over-year tonnage increases each month since April 2010. During
that period we have had some market share gains, likely made up of additional business from a variety of competitors,” Humphrey told The City Wire.

THE LEGAL BATTLE
In addition to to who is gaining or losing market share, the big issue in the LTL sector is about a potential competitive disadvantage related to wages.

ABF began Nov. 1, 2010, to seek a legal remedy to union wage concessions YRC has received. ABF and YRC operate with union drivers through a National Master Freight Agreement that was intended to set equal pay and benefits for all unionized carriers.

YRC received three rounds of wage and benefit concessions from the Teamsters, with the most recent 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 has been unable to receive similar concessions from the union.

“The harsh reality for ABFS is that they are currently at a competitive disadvantage, one largely created by the same Union that collects dues from ABFS’ Teamster employees, and there’s a strong likelihood that this competitive advantage will remain for an extended period of time unless some drastic steps are taken by outside forces,” Waldo wrote in a recent note to investor. “Unfortunately for ABFS, the eventual outcome of trying to remedy this situation is largely out of their hands.”

The ABF lawsuit seeks $750 million in damages. The case now hinges on a ruling from a three-member panel with the United States Court of Appeals for the Eighth Circuit (St. Louis). A ruling on if or how the case may proceed is expected in July.

EXTERNAL, INTERNAL PRESSURES
Waldo says it’s likely the Court will allow some form of the ABF legal action to proceed. If that happens, Waldo said, pressure on the Teamsters may force new negotiations.

Waldo notes: “A more plausible scenario, in our view, would be that the threat of another legal hearing brings ABFS and the Teamsters to the negotiating table to find a more equitable solution to the aforementioned cost discrepancy. This equitable solution could come in the form of another attempt at wages concessions/profit sharing plans, modifications to its multi-employer pension obligations, more flexible work rules and/or other similar items that YRCW was granted (all of which will most likely require a vote from ABFS’ Union employees).”

Also, Waldo believes pressure may come from unionized ABF employees.

“Additionally, at some point, we believe ABFS’ Union employees will come to realize the discrepancy between how the Union is treating its employer relative to YRCW. And given the fact that, at the end of the day, it is the employees who pay Union dues, we think there could be some added pressure from ABFS employees to create more equality (otherwise, why would you be in a Union?),” Waldo wrote.

Fitch said a legal victory for ABF would likely be the end of YRC.

“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.”