By Jessica DiNapoli, Rebecca Spalding and Svea Herbst-Bayliss
(Reuters) - YRC Worldwide Inc said on Wednesday it would give the U.S. government a 29.6% stake in the trucking company in exchange for a $700 million loan, tapping a $17 billion bailout fund originally intended for defense contractors such as Boeing Co.
It is the first time the U.S government is taking a large stake in a company seeking a bailout in the wake of the coronavirus pandemic. The U.S. Department of the Treasury has also been awarded warrants in U.S. airlines it provided aid to.
It is also the first loan announced from the $17 billion relief fund created by U.S. lawmakers to help "businesses critical to maintaining national security." Boeing lobbied for this fund but subsequently snubbed it by raising $25 billion from bond investors.
YRC's shipments tumbled in the wake of the pandemic as commercial activity slowed down. The Overland Park, Kansas-based company serves customers in the manufacturing, wholesale, retail and government sectors, according to its regulatory filings.
YRC applied for government aid in late April, but government officials were unsure at first whether the company would qualify under the terms of the fund, targeting companies with ties to national security, a person familiar with the process said.
After YRC's unionized workers threatened to strike earlier in June because YRC missed benefits payments, the Treasury treated the application with more urgency, the source said.
The Treasury also sought to expand the fund's mandate, given that some big defense contractors decided not to use it because they did not want to hand over ownership stakes to the government, the source added, requesting anonymity to discuss confidential deliberations.
"This loan will enable YRC to maintain approximately 30,000 trucking jobs and continue to support essential military supply chain operations and the transport of industrial, commercial, and retail goods to more than 200,000 corporate customers across North America," the Treasury said in a statement.
YRC was on weak financial footing even before the coronavirus-induced economic downturn. Its cash flow declined from $283.5 million in 2018 to $154 million in 2019, while its debt pile soared to $880 million as of the end of March.
The company had warned investors in May that without government assistance or a near-term term improvement in the economy, it was at risk of breaching its debt covenants and not being able to continue as a going concern.
YRC shares rallied on the news of government aid, and were trading up 84% to $3.41 in afternoon trading in New York on Wednesday, giving the company a market capitalization of $120 million. The shares had lost more than two-thirds of their value in the last two years.
"The company has been having financial problems and now its liquidity issues are essentially out the window for the next five years," Barna Capital Group Ltd Chairman Egor Romanyuk, whose investment firm holds a stake of more than 5% in YRC, said in an interview.
Barna has criticized YRC in regulatory filings for poor financial performance and overpaying board members. In April, the firm said it wanted to replace three board members, and on Wednesday, Romanyuk said he would instead suggest adding two directors to the seven-member board who have relevant experience in the trucking industry.
U.S. LAWSUIT AGAINST YRC
YRC calls itself "a leading transportation provider for the Departments of Defense, Energy, Homeland Security and Customs and Border Patrol," but does not break down in its disclosures how much of its revenue comes from the U.S. government.
In December 2018, the U.S. Department of Justice sued YRC, alleging it overcharged the Department of Defense by reweighing thousands of shipments. YRC has said the lawsuit was without merit and moved to dismiss the case.
In its initial response to the lawsuit, YRC said that its business with the Department of Defense represented less than 1% of the annual revenue it generates from freight.
In Treasury's statement on the financing on Wednesday, Treasury Secretary Steven Mnuchin called YRC "a critical vendor to the Department of Defense."
In an emailed statement, YRC spokesman Mike Kelley said the lawsuit was "a contractual dispute which originated in 2009 and predates the current board and CEO by more than a decade, and a motion for dismissal has been pending for 10 months. There has been no impact on the (Department of Defense) relationship." The Department of Justice, the Department of Defense and the Treasury did not respond to questions about the lawsuit.
(Reporting by Jessica DiNapoli and Rebecca Spalding in New York and Svea Herbst-Bayliss in Boston; Additional reporting by Susan Heavey in Washington, D.C.; Editing by Greg Roumeliotis and Bernadette Baum)