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Analyst Looks at YRC's Bankruptcy Potential

August 14, 2009

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Analyst group Stifel Nicolaus' recent downgrading of shares of YRC Worldwide to sell from hold has many in the transportation industry sitting on pins and needles, anticipating the giant's demise
. In a recent report sent to clients, the research firm said bankruptcy is increasingly possible for the less-than-truckload company, and that its deal with the Teamsters is only a temporary fix.

Last week, the Teamsters union accepted YRC's proposed labor contract changes, which called for a 15 percent pay cut from the full National Master Freight Agreement, an 18-month termination in pension contributions and a reduction in health and welfare contributions.

"Even if YRC survives through 2010, it would likely be through some kind of never-before-done-in-LTL prepackaged Chapter 11 restructuring, in our opinion, whereby the debtholders would own the company," Stifel Nicolaus said in its report.

According to the Wall Street Journal, competitors such as Estes Express Lines, Con-way, FedEx Corp. and Saia have started moving in on YRC's customers.

Other analysts in the industry have also pointed out YRC's bankruptcy potential, according to published reports. In June, Robert W. Baird & Co. downgraded YRC shares to underperform, with the prediction that the company could go bankrupt, according to Reuters.

In the communication to clients, Stifel Nicolaus analyst David Ross points out that YRC has attempted to amend its credit agreement multiple times and still hasn't managed to meet cash flow and earnings expectations. This is an indicator that the company might not be able to turn things around, Ross said.

The report also points to other reasons why YRC could fail, including the fact that management does not buy into the company's stock, the company has been pricing to defend market share, and its pricing will most likely remain low in this freight environment. Stifel Nicolaus also says that YRC Logistics' carriers are still nervous about whether the company can pay out. While YRC stock price to date in August has risen 64 percent, the analysts believe the boost was caused by short-covering, not the recent Teamsters deal.

YRC Worldwide issued the following statement in response:

"YRC Worldwide continues to report significant progress on its comprehensive plan to manage through the economic recession. Through the ongoing support of its key stakeholders including its lender group, union and non-union employees and pension funds, the company is moving forward with its strategic plans to restore financial strength and position its operating companies for future success."

The company pointed out that the modified labor agreement will mean an immediate estimated savings of approximately $45 million per month in 2009, and the savings increase to $50 million per month in 2010. The company also recently announced it will improve its liquidity by selling facilities to North American Terminals Management for approximately $81 million. Sales and leaseback transactions are expected to generate around $375 million of cash proceeds, YRC says, and excess property sales should generate over $100 million in 2009.

"The recent bank amendment which eliminates the third quarter covenant and resets the EBITDA covenants through 2010, provides YRC Worldwide additional flexibility to meet the needs of its customers," the YRC statement continued. "The company continues to work with its lenders to evaluate the need for long-term modifications to its credit agreements. In addition, the company is in discussions with groups of its bondholders to address the maturities of bonds next year."

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