YRC Worldwide YRCW
June 06, 2010 - 10:01pm EST by
tyler939
2010 2011
Price: 0.33 EPS $0.00 $0.00
Shares Out. (in M): 1,054 P/E 0.0x 0.0x
Market Cap (in $M): 346 P/FCF 0.0x 0.0x
Net Debt (in $M): 1,090 EBIT 0 0
TEV ($): 1,440 TEV/EBIT 0.0x 0.0x

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Description

YRC Worldwide is a misunderstood name that has gone through some very tough times and came very close to bankruptcy, yet astutely managed an exchange offer that was tantamount to a bankruptcy reorganization that eliminated its most pressing debt problems and is regaining many of the customers it had lost during the darkest days of the company's crisis.  The company is now poised to do well as the economy continues to recover, yet continues to be punished by the marketplace.  This is, however, my speculative value idea for the year-there are two scenarios under which YRCW could, and probably would, fall to zero, the first being a double-dip recession, and the second being a dramatic and long-term increase in diesel prices without a concomitant increase in US GDP.  So if you think the European contagion is going to drives us back into recession or that Israel is getting ready to bomb Iran, this is not the idea for you.  I think the upside is much larger than the downside, and that the doomsday scenarios are unlikely.

The LTL Industry

YRCW , the result of a combination of Yellow Transportation and Roadway, is the largest less-than-truckload (LTL)-focused trucking company in the US. 

LTL, which is about 5% of the US trucking market, fills the gap between traditional carriers, which primarily transport goods by the full-truckload, and the express companies (e.g., FedEx and UPS), which primarily transport single packages.  LTL carriers consolidate the goods of several shippers who need to ship less than a truckload of goods, then send (ideally) a full truckload of goods from those shippers to the destination.  Before 2009, YRC accounted for around 25% of the LTL market.

YRC's largest publicly-traded LTL competitors are Arkansas Best (ABFS, which, like YRCW, focuses on long-haul rather than regional LTL and is unionized) and Old Dominion (regional LTL, non-unionized).  Other major competitors are Con-way Freight (not public) and FedEx and UPS (for which LTL is a small percentage of their business).  The industry is fragmented, however, with many smaller carries competing with the "big boys."

Trucking tonnage, including the LTL segment, largely follows the US economy, but there is some variation.  Tonnage shipped by truck boomed through the early 2000's, lost about 5% per year in 2006-2007 (but off record volumes), recovered by about 5% in 2008, then fell by around 15% in 2009.  Current shipments are up around 5% off the dismal 2009 levels.

In addition to the US recession, LTL has faced some long-term headwinds, primarily from the growth of the third-party logistics provider industry, which allows particularly smaller manufacturers to pool shipping needs to reduce costs by, in part, squeezing trucking companies.  Traditional LTL carriers have also faced increasing competition from growth of LTL from smaller, regional, primarily full-truckload carriers and from UPS and FedEx.  These trends are likely to continue, so I wouldn't recommend YRCW or any LTL carrier as a multi-year buy-and-hold stock.

YRCW's Recent Woes

Here are the 2008 and 2009 revenues of YRCW, ODFL, and ABFS, expressed as a fraction of 2006 peak earnings (2006 for YRCW and ABFS, 2007 for ODFL):

                                2009       2008

YRCW                    53%        90%

ODFL                     97%        120%

ABFS                      79%        99%

 

Regional LTL has fared far better than long-haul in the US recession, which is one reason ODFL has outperformed YRCW and ABFS.

 

YRCW entered 2009 with a considerable debt load, and industry-high costs due to heavy unionization.  As the industry declined in 2009, some competitors, notably FedEx and Con-way, saw that YRCW was vulnerable.  Those two companies dropped their rates by 12%-15% (YRCW and other major competitors maintained price discipline, with rate cuts in the 3% to 6% range).  This was generally viewed in the trucking industry as an attempt to drive YRCW out of business (and that's my opinion, too).  As customers say YRCW's increasing financial difficulties, those customers moved increasingly to other carriers, which, explains the why YRCW's revenues declined 40% from 2008 to 2009 when the industry generally declined 15%.

The future for LTL seems to promise a fairly slow, but real recovery.  SJ Consulting has estimated LTL to grow at around a 5% CAGR for the next three years, based on a comparison of historical LTL tonnage against GDP and using the Congressional Budget Office's 3.7% CAGR for GDP).

YRCW's Miraculous Recovery

In 2009, the company sold some of its facilities, reduced headcount by 35%, achieved significant labor concessions from the Teamsters and, at the end of the year, completed a debt-for-equity exchange that put the bulk of the company's equity into the hands of former bondholders (in the form of convertible preferred stock, which automatically converted to common in February).  In addition, consultants I've spoken with tell me that FedEx and Con-way seem to have given up their price war following YRCW's restructuring.

Management has consistently reported anecdotal evidence (which I put some value in) and results of customer surveys (of which I'm very skeptical) showing that customers are returning to the company.  The CEO, Bill Zollars reported at the May Wolfe Research Transportation Conference that YRCW broke even on an EBITDA basis in April, and said that management feels "really good about [their] ability to generate positive EBITDA in the second quarter...."  They expect to fund their capex this year of around $50 million with real estate sales and sale-leasebacks. 

Zollars said in a presentation (I'm not sure where, but it's available on Bloomberg dated May 21, 2010) projecting revenue of around $10 billion this year, which would exceed their peak revenue in 2006 of $9.9 billion.  It's hard for me to see how they can reach that level this year, and it's possible that Zollars misspoke, but I do expect revenues of around $7.5 billion (around 75% of peak).   1Q10 revenues ran at 71% of 1Q09 levels, which would put the company on track for 65% of peak sales.  As I discuss below, YRCW is significantly undervalued even if it does not track this level of recovery.

Normalized YRCW

YRCW has shed significant assets, so, even with the return of customers this year and the slow recovery of LTL that I expect, it is not going to reach its peak revenues anytime soon.

If you assume that Arkansas Best, YRCW's closest competitor (because it a unionized, primarily long-haul LTL carrier) grows revenues 10% from 2009 levels by 2012, matching expected industry growth, ABFS stock is trading at a current EV/normalized sales ratio of 27%.  Assuming that YRCW grows revenues by 20% in that same time frame (10% due to returning customers, as more shippers understand that YRCW is going to survive, and 10% to match industry growth), it is currently trading at an EV/normalized earnings of 23%.  By this measure, YRCW is trading at a 20% discount.  When you compare this to actual 1Q10 performance (YRCW revenues up 35% y-o-y versus ABFS revenues down 1%), the undervaluation becomes more striking.

Upcoming Events

ATM offering:  YRCW, when it released 1Q10 earnings in early May, also announced an at-the-market offering of $103 million.  Assuming this is done at the current price of $0.35, that would add another 295 million shares outstanding, or 28%.  I have assumed in my EV/Sales calculations above that they raise all $103 million at $0.35.  Nevertheless, this offering could limit upside until it is completed.  My take is that the ATM offering, though dilutive, is good for equity because it reduces the risk that the company will fall back into serious financial distress.   The sell side disagrees.  But, again, the offering is already baked into my relative valuation.

Debt Covenants:  YRCW's bank lenders have entered into a series of modifications of the terms of YRCW debt, most notably granting YRCW relief from debt covenants in exchange for an extension of the terms of the loans in connection with the debt-for-equity swap.  These covenants will grow more restrictive over time.  For example, YRCW must have no more than a $5 million negative EBITDA in 2Q10, though the company seems to be on track for positive EBITDA.  The simple fact is that YRCW's assets are worth far less than the company is worth as a going concern, and YRCW's recent history indicates that the company would not survive an attempt at a Chapter 11 reorganization-that's why there is some chance, in the event of a double dip recession or enormous unexpected increase in diesel prices, that the stock could go to zero.   YRCW's lenders have demonstrated that they are willing to work hard not to put the company into bankruptcy,  and I don't expect that they would do so for a covenant breach unless circumstances were far more dire than they are today.

Pension Relief:  YRCW has $155 million (50% of current market cap) of pension liability related to its participation in a multi-employer pension plan for which many employers are no longer in business.  There have been some calls in Congress to provide relief to employers with underfunded pensions by giving them additional time to fund, and also a proposal to forgive pension obligations relating to other employers in a multi-employer plan.  The first has a reasonable chance of passing later in 2010, though I am skeptical that the second measure, which would be far more valuable to YRCW, will be approved.  Nevertheless, these are upcoming potential catalysts.  I have included the pension liability as debt in my EBITDA calculations, but have not given the company any value for pension relief.

Reverse Split:  The company will do a reverse split in the near future in the range of 1:5 to 1:25.  My firm has studied performance after reverse splits, and the results are a mixed bag.  Stifel,  Nicolaus's analyst, who has a sell on the stock and is concerned about the covenant issues and the ATM offering, has suggested that the shares may be a good short after the reverse split, so there may be some pressure there.  My fund isn't a Stifel customer, so I haven't spoken with him about this, but I disagree with him, and think that shorting YRCW (does anyone short a $0.35 stock, anyway?) would prove disastrous.

Catalyst

Earnings around the end of July and the end of October, showing return of customers to the company.
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    Description

    YRC Worldwide is a misunderstood name that has gone through some very tough times and came very close to bankruptcy, yet astutely managed an exchange offer that was tantamount to a bankruptcy reorganization that eliminated its most pressing debt problems and is regaining many of the customers it had lost during the darkest days of the company's crisis.  The company is now poised to do well as the economy continues to recover, yet continues to be punished by the marketplace.  This is, however, my speculative value idea for the year-there are two scenarios under which YRCW could, and probably would, fall to zero, the first being a double-dip recession, and the second being a dramatic and long-term increase in diesel prices without a concomitant increase in US GDP.  So if you think the European contagion is going to drives us back into recession or that Israel is getting ready to bomb Iran, this is not the idea for you.  I think the upside is much larger than the downside, and that the doomsday scenarios are unlikely.

    The LTL Industry

    YRCW , the result of a combination of Yellow Transportation and Roadway, is the largest less-than-truckload (LTL)-focused trucking company in the US. 

    LTL, which is about 5% of the US trucking market, fills the gap between traditional carriers, which primarily transport goods by the full-truckload, and the express companies (e.g., FedEx and UPS), which primarily transport single packages.  LTL carriers consolidate the goods of several shippers who need to ship less than a truckload of goods, then send (ideally) a full truckload of goods from those shippers to the destination.  Before 2009, YRC accounted for around 25% of the LTL market.

    YRC's largest publicly-traded LTL competitors are Arkansas Best (ABFS, which, like YRCW, focuses on long-haul rather than regional LTL and is unionized) and Old Dominion (regional LTL, non-unionized).  Other major competitors are Con-way Freight (not public) and FedEx and UPS (for which LTL is a small percentage of their business).  The industry is fragmented, however, with many smaller carries competing with the "big boys."

    Trucking tonnage, including the LTL segment, largely follows the US economy, but there is some variation.  Tonnage shipped by truck boomed through the early 2000's, lost about 5% per year in 2006-2007 (but off record volumes), recovered by about 5% in 2008, then fell by around 15% in 2009.  Current shipments are up around 5% off the dismal 2009 levels.

    In addition to the US recession, LTL has faced some long-term headwinds, primarily from the growth of the third-party logistics provider industry, which allows particularly smaller manufacturers to pool shipping needs to reduce costs by, in part, squeezing trucking companies.  Traditional LTL carriers have also faced increasing competition from growth of LTL from smaller, regional, primarily full-truckload carriers and from UPS and FedEx.  These trends are likely to continue, so I wouldn't recommend YRCW or any LTL carrier as a multi-year buy-and-hold stock.

    YRCW's Recent Woes

    Here are the 2008 and 2009 revenues of YRCW, ODFL, and ABFS, expressed as a fraction of 2006 peak earnings (2006 for YRCW and ABFS, 2007 for ODFL):

                                    2009       2008

    YRCW                    53%        90%

    ODFL                     97%        120%

    ABFS                      79%        99%

     

    Regional LTL has fared far better than long-haul in the US recession, which is one reason ODFL has outperformed YRCW and ABFS.

     

    YRCW entered 2009 with a considerable debt load, and industry-high costs due to heavy unionization.  As the industry declined in 2009, some competitors, notably FedEx and Con-way, saw that YRCW was vulnerable.  Those two companies dropped their rates by 12%-15% (YRCW and other major competitors maintained price discipline, with rate cuts in the 3% to 6% range).  This was generally viewed in the trucking industry as an attempt to drive YRCW out of business (and that's my opinion, too).  As customers say YRCW's increasing financial difficulties, those customers moved increasingly to other carriers, which, explains the why YRCW's revenues declined 40% from 2008 to 2009 when the industry generally declined 15%.

    The future for LTL seems to promise a fairly slow, but real recovery.  SJ Consulting has estimated LTL to grow at around a 5% CAGR for the next three years, based on a comparison of historical LTL tonnage against GDP and using the Congressional Budget Office's 3.7% CAGR for GDP).

    YRCW's Miraculous Recovery

    In 2009, the company sold some of its facilities, reduced headcount by 35%, achieved significant labor concessions from the Teamsters and, at the end of the year, completed a debt-for-equity exchange that put the bulk of the company's equity into the hands of former bondholders (in the form of convertible preferred stock, which automatically converted to common in February).  In addition, consultants I've spoken with tell me that FedEx and Con-way seem to have given up their price war following YRCW's restructuring.

    Management has consistently reported anecdotal evidence (which I put some value in) and results of customer surveys (of which I'm very skeptical) showing that customers are returning to the company.  The CEO, Bill Zollars reported at the May Wolfe Research Transportation Conference that YRCW broke even on an EBITDA basis in April, and said that management feels "really good about [their] ability to generate positive EBITDA in the second quarter...."  They expect to fund their capex this year of around $50 million with real estate sales and sale-leasebacks. 

    Zollars said in a presentation (I'm not sure where, but it's available on Bloomberg dated May 21, 2010) projecting revenue of around $10 billion this year, which would exceed their peak revenue in 2006 of $9.9 billion.  It's hard for me to see how they can reach that level this year, and it's possible that Zollars misspoke, but I do expect revenues of around $7.5 billion (around 75% of peak).   1Q10 revenues ran at 71% of 1Q09 levels, which would put the company on track for 65% of peak sales.  As I discuss below, YRCW is significantly undervalued even if it does not track this level of recovery.

    Normalized YRCW

    YRCW has shed significant assets, so, even with the return of customers this year and the slow recovery of LTL that I expect, it is not going to reach its peak revenues anytime soon.

    If you assume that Arkansas Best, YRCW's closest competitor (because it a unionized, primarily long-haul LTL carrier) grows revenues 10% from 2009 levels by 2012, matching expected industry growth, ABFS stock is trading at a current EV/normalized sales ratio of 27%.  Assuming that YRCW grows revenues by 20% in that same time frame (10% due to returning customers, as more shippers understand that YRCW is going to survive, and 10% to match industry growth), it is currently trading at an EV/normalized earnings of 23%.  By this measure, YRCW is trading at a 20% discount.  When you compare this to actual 1Q10 performance (YRCW revenues up 35% y-o-y versus ABFS revenues down 1%), the undervaluation becomes more striking.

    Upcoming Events

    ATM offering:  YRCW, when it released 1Q10 earnings in early May, also announced an at-the-market offering of $103 million.  Assuming this is done at the current price of $0.35, that would add another 295 million shares outstanding, or 28%.  I have assumed in my EV/Sales calculations above that they raise all $103 million at $0.35.  Nevertheless, this offering could limit upside until it is completed.  My take is that the ATM offering, though dilutive, is good for equity because it reduces the risk that the company will fall back into serious financial distress.   The sell side disagrees.  But, again, the offering is already baked into my relative valuation.

    Debt Covenants:  YRCW's bank lenders have entered into a series of modifications of the terms of YRCW debt, most notably granting YRCW relief from debt covenants in exchange for an extension of the terms of the loans in connection with the debt-for-equity swap.  These covenants will grow more restrictive over time.  For example, YRCW must have no more than a $5 million negative EBITDA in 2Q10, though the company seems to be on track for positive EBITDA.  The simple fact is that YRCW's assets are worth far less than the company is worth as a going concern, and YRCW's recent history indicates that the company would not survive an attempt at a Chapter 11 reorganization-that's why there is some chance, in the event of a double dip recession or enormous unexpected increase in diesel prices, that the stock could go to zero.   YRCW's lenders have demonstrated that they are willing to work hard not to put the company into bankruptcy,  and I don't expect that they would do so for a covenant breach unless circumstances were far more dire than they are today.

    Pension Relief:  YRCW has $155 million (50% of current market cap) of pension liability related to its participation in a multi-employer pension plan for which many employers are no longer in business.  There have been some calls in Congress to provide relief to employers with underfunded pensions by giving them additional time to fund, and also a proposal to forgive pension obligations relating to other employers in a multi-employer plan.  The first has a reasonable chance of passing later in 2010, though I am skeptical that the second measure, which would be far more valuable to YRCW, will be approved.  Nevertheless, these are upcoming potential catalysts.  I have included the pension liability as debt in my EBITDA calculations, but have not given the company any value for pension relief.

    Reverse Split:  The company will do a reverse split in the near future in the range of 1:5 to 1:25.  My firm has studied performance after reverse splits, and the results are a mixed bag.  Stifel,  Nicolaus's analyst, who has a sell on the stock and is concerned about the covenant issues and the ATM offering, has suggested that the shares may be a good short after the reverse split, so there may be some pressure there.  My fund isn't a Stifel customer, so I haven't spoken with him about this, but I disagree with him, and think that shorting YRCW (does anyone short a $0.35 stock, anyway?) would prove disastrous.

    Catalyst

    Earnings around the end of July and the end of October, showing return of customers to the company.

    Messages


    SubjectRE: RE: multi-employer pension plans
    Entry06/07/2010 04:01 PM
    Memberarmand440
    i think the multi-employer pension and other post-retirement liability (all off-balance sheet) is in the billions.  the central states plan is supposedly in very bad shape (that's why UPS had to make a $5-6 billion contribution to get out of it).  i think you should include the entire multi-employer liability when considering valuation (not just the deferred part).  please correct me if my reasoning is incorrect.
     
     

    Subject#'s
    Entry06/07/2010 04:02 PM
    Membermiser861
    Not sure if i missed an attached model somewhere, but looks like you give almost no data on what you think the business and or equity is worth.  With no supporting data???

    SubjectRE: #'s
    Entry06/07/2010 04:29 PM
    Membertyler939
    armand440, I agree that any extraordinary pension liabilities should be included.  If there are off-balance sheet liabilities in the billions, I've never been aware of them, and you've saved me from what would have been a serious error; YRCW can't survive if it owes billions in pension liabilities.  I am investigating further and will report back.
    miser861, as usual, when I try to build a DCF or forward EBITDA model for valuation of a company with significant operating uncertainties, I get a huge range of values.  Comparing EV to normalized sales at Arkansas Best, I think YRCW is 20% undervalued.  That would put YRCW stock around $0.36.  I've tried to be conservative here, since I think there's potential for a much better relative recovery at YRCW, but there remains what I think is a small but real chance of the stock going to zero in bankruptcy at the end of 2011.

    SubjectRE: RE: RE: RE: RE: #'s
    Entry06/17/2010 09:37 AM
    Membertyler939
    The Central States pension plan is in trouble, and, barring the bull market to end all bull markets, it is going to be insolvent sometime in the next 10 to 20 years.  Right now, the plan is charging a surcharge to the employers who still remain to keep the plan alive.  This surcharge is about 40% of the amount that YRCW pays to the plan (i.e., there is an assessment of 67% on YRCW's pension contributions).  YRCW is not liable for its $7 billion pro-rata share of the plan's underfunding unless YRCW withdraws from the plan (i.e., stops hiring Teamsters) except to the extent of the surcharge.  Pretty much everyone seems to think that the plan will be put into receivership by the PBGC eventually, at which time the remaining underfunded amount should be wiped out, without YRCW being required to pay it.  That's why the $7 billion is underfunded.
    Right now, there are two sources of uncertainty.  The first is that YRCW has not disclosed how much of its obligation to the Central States plan has been deferred.  The $155 defered pension liability on their balance sheet covers only non-union pension plans.  I can't imagine that the deferred liability under the union plan is much larger, both because most YRCW employees are unionized and because of the surcharge on the Central States plan contribution.  This means that there is several hundred million dollars of liability that I have not included in my analysis.
    The second uncertainty is how much the Central States plan will require YRCW to pay in the future, before the plan finally goes bust.  The current 40% surcharge may only be the beginning.
    While I note that ODFL, my primary comp for YRCW, faces similar surcharge issues (they are also in the Central States plan), it's hard for me to maintain right now that YRCW is a good value investment when I can't pin down the amount of the pension liability they have deferred.  I'm looking into this, and I will post here when I have something concrete on this liability.

    SubjectRE: RE: RE: RE: RE: RE: #'s
    Entry06/24/2010 11:28 AM
    Memberlordbeaverbrook
    hi tyler -- do you know any reason why the stock has been very weak the past few weeks?  also, i don't understand your comment: "YRCW is not liable for its $7 billion pro-rata share of the plan's underfunding unless YRCW withdraws from the plan (i.e., stops hiring Teamsters) except to the extent of the surcharge.  Pretty much everyone seems to think that the plan will be put into receivership by the PBGC eventually, at which time the remaining underfunded amount should be wiped out, without YRCW being required to pay it.  That's why the $7 billion is underfunded."
     
    To me this seems like a real liability, that eventually must be paid (of course, the liabilty could become larger or smaller due to asset returns, changes in assumptions, etc.).  I would be shocked if PBGC became involved without first wiping out YRCW equity.  is there any precedent, for the PBGC becoming involved in making a pension plan whole, without first wiping out equity holders.  thanks.

    SubjectCentral States Plan
    Entry06/29/2010 05:06 PM
    MemberSiren81
    Hey guys - just wondering if you had any more thoughts on YRC's multi-employer pension liability - thanks

    SubjectRE: RE: RE:...
    Entry07/01/2010 06:11 PM
    Membertyler939
    I wish I knew why the stock is down so much (and my apologies to anyone who might have gone long because of this idea--all I can say to you is that I share your pain).  YRCW has had a beta of around 1.1 since the refinancing, so I can't explain it by the overall market's decline.  There is a lot more talk of a double dip recession now, and YRCW probably wouldn't survive that.  I don't think it's going to happen--I still expect a slow recovery--but that's the most rational reason I can find for the miserable performance of the stock. 
    When the PBGC takes over a multi-employer pension plan, it does not have a claim for the underfunded amounts on the employers; that comes from PBGC's balance sheet.  The underfunded amount attributable to an employer comes due when the employer leaves the plan (i.e., if YRCW had no Teamster employees, a very unlikely event) or goes insolvent (in which case equity will be wiped out in any event).  PBGC does not have the right to wipe out YRCW's equity unless YRCW leaves the plan.
    However, Central States has been designated as "critical" by the Pension Benefits Guarantee Administration, with assets at year-end 2009 covering around 50% of vested benefit obligations.  Under the Pension Protection Act of 2006, operating under a rehabilitation plan that increases annual funding by employers and puts limits on withdrawals.  So, until PBGC seizes the plan, Central States will be able to extract funds from YRCW to support the "orphan employees" (workers from other employers in the plan that are now defunct) in addition to YRCW's own employees.  The surcharge is currently 40% of YRCW's funding obligation with respect to its own employees.
    If the PBGC eventually seizes the plan, then YRCW will continue to pay the surcharge until the PBGC takes action, at which time YRCW will be relieved of the liability.
    If the Central States plan is never seized by PBGC, then YRCW will continue to have to pay the surcharge as long as the plan is considered "critical."  A large upward move in the markets would relieve this burden, though, of course, a downward movement would make the situation worse.  In this scenario, YRCW would have to pay the full $7 billion unless fund assets grow significantly.
    Under legislation introduced by Sen. Casey, the PBGC would assume responsibility for payment in full of benefits for orphan employees, thus relieving YRCW of its obligation to make the extra payments under the rehabilitation plan.  I'm very skeptical that this legislation will pass, because it would require funding; PBGC itself is insolvent.

    Subjectcourt decision re put feature of YRC bonds
    Entry07/06/2010 07:05 PM
    Membertyler939
    Two of YRC's classes of debt have put provisions that could force bondholders to put those bonds at par to YRC (around $20 million in August 2010 for the YRC 5% 2023s and $2 million in November 2012).  In the debt-for-equity exchange, YRC sought consents from holders of those bonds to remove the put feature from the bond indentures.  In January, YRC asked a Kansas court to issue a judgment declaring that those puts were no longer valid.  This morning, the court ruled that the puts were valid, so YRC will have to pay par for these bonds. 
    I never expected YRC to win this case, so it's no more than a small incremental negative in my book, but it is, nevertheless, a negative.  YRC should be able to raise the money by selling additional convertible bonds.  Should there be a material negative change in YRCW's operations, the purchasers would not be required to purchase the additional converts.  In that case, YRCW would be forced to raise more equity or to seek consent from its banks to raise additional debt (there is no reason for the banks to say no).
    The YRCW5% bonds last traded at $85.00, up aroudn $17, so the market thinks there is a respectable chance that YRCW will default.  I disagree. 

    Subjectplan liabilities in bankruptcy
    Entry07/07/2010 10:32 AM
    Membertyler939
    If YRC were to be liquidated or were to withdraw from the plan, the Pension Benefits Guarantee Corporation would have a claim against YRC for the $7 billion termination fee.  This would put them behind secured lenders.  Under the Employee Retirement Income Security Act, all companies in a controlled group that participate in a plan are liable for the full amount of the obligation owed to PBGC, so PBGC would rank with the unsecured creditors of each unionized subsidiary of YRC; it is possible that PBGC might be able to recover funds from a YRC subsidiary that would not be available to the unsecured creditors of the parent.  In effect, PGBC would stand at least in line with other unsecured creditors and, in some cases, ahead of the line.
    It is also possible that, if YRCW reorganizes in bankruptcy but continues to participate in the plan, it will continue to be responsible for the $7 billion upon withdrawal from the plan just as it is now.
    In some ways it makes no difference, since, if YRC enters bankrupcty, equity will be wiped out.

    SubjectYRCW
    Entry08/02/2010 03:51 PM
    Membertyler939
    YRCW is now up 18% since I first posted the idea (including $0.01 per side as assumed trading costs).  Over the same time period, the Russell 2000 index is up 5.5 percent; YRCW has an adjusted beta to the 2000 of 2.0, so it should have been up 11% on the increase in the index alone.  My fund is still long, but, given the pension issues that others raised here, I think that for a value investor, it's not a bad idea to take the 7% outperformance over the last 2 months as profit.  Sorry for the roller coaster ride for anyone who invested.
    YRC reports tomorrow, August 3.  I will give you my thoughts then.  Two weeks ago, they pre-announced adjusted EBITDA from continuing operations of $35 to $45 million, far above anyone's expectations, so I expect the interest in the announcement to focus less on the numbers and more on what management says about regaining departed business and ongoing cost cutting.

    SubjectRE: RE: Updates?
    Entry11/01/2010 09:24 PM
    Membertyler939
    Operations
    Things are better than I expected for YRCW operationally, and the new contract with the Teamsters will help considerably (but see the discussion of the restructuring, below).  In general, prices continue to rise in the trucking industry with Fedex and Conway no longer trying to drive YRC out of business.  Since price increases pretty much follow through to the bottom line, YRC has serious earnings potential.  A 5% increase in prices would translate into $250 million of EBITDA annually.  At the current industry multiple of around 8x EBITDA, that would add $2 billiion to YRC's value.
    Pension
    As for the pension, I agree that the company needs a government bailout to survive.  That bailout doesn't need to come in the form of legislation, since under current law, when Central States is eventually taken over by PBGC, PBGC will pay the deficiency, not YRCW.  Anyway, the Teamsters aren't a Republican-leaning union anymore, and it's hard for me to see how the post-election Congress will support this kind of bailout.  As a practical matter, this means YRCW will face higher contributions to the pension plan than it would if Central States were solvent, but YRCW is not on the hook for all of it's portion of the underfunding unless it leaves the plan.
    Restructuring
    In general, the banks have supported management, since they do not want the company to go into Chapter 7, so they have been willing to extend deadlines and relax covenants.  As YRCW recovers, they will have more negotiating power, but I don't expect the banks to take any action that would endanger the company's survival.
    The latest union concessions require YRC to reduce its debt load, and give the union the right to force YRCW to raise another $300 million in new equity if they do not think that YRC is financially stable.  Given that the current market cap is only $220 million, it's hard to see how the company can exchange a significant portion of its $1.2 billion in debt without seriously diluting equity value.  I'm sure the banks would be satisfied letting the union force YRC to rasie the extra $300 million in equity, which would also cause significant dilution unless done in the form of a rights offering, and I've heard no talk of that possibility.
    The potential for a highly dilutive restructuring is very scary for stockholders.  So, while I believe in the fundamental story, I'm concerned that now is not the time to be holding the stock because of the restructuring overhang.
    Arkansas Best Grievance
    One wild card is that Arkansas Best today (Nov. 1) filed a grievance, and a lawsuit requesting the appointment of a neutral panel to hear that grievance.  The grievance claims that the Teamsters and YRC, by giving YRC concessions, violated the National Master Freight Agreement (NMFA), the collective bargaining agreement covering most unionized truckers.  The case is ABF Freight System, vs. Intenational Brotherhood of Teamsters, et. al., 5:10-cv-5209, US District Court for the Western District of Arkansas.
    The central issue here is whether YRCW and the Teamsters can amend the NMFA as it applies to YRCW without the consent of the other employers party to the plan.  Here's the relevant language from the NMFA:
    The employees, Unions, Employers and Associations covered under this Master agreement... shall constitute one (1) bargaining unit and contract.... (Art. 2, Sec. 4)
    The Employer agrees... that all conditions of employment.... relating to wages, hours of work, overtime differentials and general working conditions shall be maintained at not less than the highest standards in effect at the time of the signing of this Agreement....  (Art. 6, Sec. 1)
    The Employer agrees not to enter into any agreement or contract with its employees, individually or collectively, which in any way conflicts with the terms and provisions of this Agreement.  Any such agreement shall be null and void.  (Art. 6, Sec. 2(a))
    The parties agree to becmoe a part of the multi-employer, multi-union bargaining unit established by this National Master Freight Agreement, and to be bound by the interpretations and enforcement of this National Master Freight Agreement.... (Art 31)
    Arkansas Best noted in its grievance that language that specifically permitted pay reduction plans for individual employers in the NMFA in effect before 2008 does not appear in the current NMFA.
    Is Arkansas Best right?  My short answer is that I don't know enough about labor law to be confident in judging.  Certainly Arkansas Best thought single-employer concessions were OK when it asked for it's own from the Teamsters (which the union rejected).  If Arkansas Best were to prevail, it would put the survival of YRC into serious doubt.

    SubjectWhy no chapter 11?
    Entry11/02/2010 09:06 AM
    Memberndn86
    Very interesting, thank you for the update.
     
    My initial reaction is that the bank debt holders are being far too lenient.  Are they pari with much of the other debt/claims out there that would lead them to believe, on a pro-rata basis, their claims on the estate are not 1.2 billion senior secured 1st lien on 3 billion of assets? 
     
    You mentioned that the company wouldn't survive a a chapter 11.   Why don't the banks force a chapter 11 which would ultimately remove the (assumed) unsecured pension claims and any concern about the NMFA?  NewCo YRCW could renegotiate with the teamsters in good faith, including pension, and both parties would have a sustainable operating company ready to capture the upswing in the markets.  Instead, they've got this significant enterprise in a rising market hobbled by ridiculous liability so much so that trading partners are going elsewhere and value is being destroyed across the capital structure.
     
    It seems too easy... what am I missing?

    SubjectRE: RE: Why no chapter 11?
    Entry11/02/2010 08:52 PM
    Membertyler939

    Banks

    The banks are senior to other debt, including security interests on almost all of YRCW's assets.  I don't see how YRCW can do a chapter 11 reorganization, since it's not that hard to pick a carrier not in bankruptcy.  We saw how readily half of YRCW's business disappeared when it appeared they would go insolvent, and I would not expect that to change if they did enter bankruptcy.  I think the banks have been doing the right thing--their collateral isn't valuable enough to give them a full recovery, and isn't likely to decline in value right now, but if the company survives, it is likely to pay off the debt in full.

    I question whether the banks are interested in turning their status as secured and senior lenders into equity, even at a significant discount.  If they did, the equity overhang would be considerable, so who knows where the stock would go?  Besides, the banks have every reason to want to force the union to force the company to raise the $300 million in new equity.  The only counterargument I have to that is that the banks have no doubt been involved in the negotiations between the company and the union, so they have probably signed off on some restructuring package, however limited.

    The dilution from a debt for equity swap and a $300 million offering loom larger in my mind than the pension issues or the Arkansas Best suit.  Having said that, YRCW is a huge call option on the trucking market, and that option has value.  I'm not as bullish as I used to be, but my firm still owns the stock.
    Pension
    I'm not an expert on multi-employer plans, either, but I've spent a fair amount of time working through ERISA to see how it applies here.  When a multiemployer pension plan goes insolvent, three things happen.  First, under Sec. 1431, PBGC can make a loan to the plan.

    Second, Sec. 1322a requires PBGC to pay the benefits due under the plan to the extent that the plan does not.  There are limits that cap PBGC's exposure. 

    Finally, under Sec. 1342, PBGC can force the termination multiemployer plan when it can't pay benefits as required (or if some other conditions essentially meaning that the plan is insolvent happen).  This is usually in the interest of PBGC when a plan can no longer make full payments of benefits because the PBGC gets the benefit of the Sec. 1322a caps and gets to take the assets away from the plan sponsor.  No doubt the PBGC thinks it can do a better job with an appointed trustee than the Teamsters would in shepherding plan assets.  Employers participating in multi-employer plans are not required to make up shortfalls when PBGC terminates a plan.

    Other Lawsuits

    I would expect other competitors to sue, since there's little downside.  Arkansas Best has asked, if their request for an independent tribunal to hear their case is denied, for class action status for the case.  If it wins, Arkansas Best isn't going to get the $750 million it is asking for--their measure of damages is hardly as large as what they claim they would have saved in wages had they been given the same deal.  What they really want is for the YRCW concessions to be held invalid.  I know a fair amount about contract law, but not very much about labor law, so you can take this with a large grain of salt, but I think YRCW's likely to prevail, though it's far from a slam dunk.

    SubjectRE: 10K disclosure and chapter 11
    Entry03/17/2011 02:35 PM
    Membertyler939
    andrew re 10K disclosure:   The reorganization is similar, to the limited extend we know what it will be, to what would happen in Chapter 11.  I think the reorganization will very likely happen, so the real issue is how much equity is diluted.
    Increasing fuel prices are a serious concern.
    I'm out of the name, and haven't been updating my models, so my thoughts on the stock going forward are pure speculation.  For what it is worth, I'd rather be short than long right now because of the dilution threat.
    ndn86 re Chapter 11:  LTL is a spot market, so it is easy to switch.  If you were a shipping manager, how would you feel about using a carrier that might get your freight stranded in transit?  I think the company would try to reorganize, but it's going concern value would diminish a lot in a bankruptcy.  Also, a bankruptcy filing might cause larger competitors to reduce their prices again to try to drive YRCW out of the market.

    SubjectRE: time to discuss as a long?
    Entry05/03/2013 01:24 PM
    Memberlordbeaverbrook
    otto -- a lot of people have been burned by YRCW because they don't understand what a multi-employer pension plan is.  i would suggest you do a lot of work on understanding MEPP before you buy YRCW.  These liabilities are completely off-balance sheet and are massive.  please be very careful!

    SubjectRE: RE: time to discuss as a long?
    Entry05/03/2013 01:33 PM
    Memberotto695
    hmmm...i will look into this.  Are ODFL and ABFS in the same situation?

    SubjectRE: RE: RE: time to discuss as a long?
    Entry05/03/2013 01:42 PM
    Memberlordbeaverbrook
    odfl does not have exposure...
    abfs has lots of exposure...
     

    SubjectRE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 02:27 PM
    Memberotto695
    I see some analyst commentary on the MEPP, but they've had this liability all along.  Are you saying they should got no credit for improving the operations of the company?    Ex-MEPP it was trading about 6.3x ev/ebitda prior to the most recent improvement and now it is trading at about 5.3x, even after this significant improvement.  Seems like a good probability we get an anlayst upgrade or two this quarter or next .  trajectory of OR improvement could even accelerate as they just got a deal with the union to lower costs by about 30m and indicated that they expect meaningful improvement from new software being introduced in the short-run.  If you believe that the MEPP is all that matters, than why would ABFS or YRCW or any of the countless other public companies with MEPP obligations even have any equity left?  might as well zero out their equity now and why would managements of those companies even bother coming to work?  Again, just want to open this up for discussion...

    SubjectRE: RE: RE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:10 PM
    Memberlordbeaverbrook
    just looked at most recent 10-k and the company said exit liabilty is about $10 billion.  i don't have the time to explain what all this means, but hopefully it will give you a sense of the magnitude of the problem...
     
    good luck...

    SubjectRE: RE: RE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:22 PM
    Memberotto695
    yes, same as its been all along.  this is a hard one to value, given the leverage and the OBS obligations.  all i can say is that it could work here with catalysts ahead and all analysts on the sidlines right now and with stock looking like it is up alot, whereas it is barely up:  today's move is adding about $24M in market value, given that there are only 8m shares outstanding.  since the quarterly improvement implies at least $40m in annual ebitda outperformace, one could argue that the equity value should improve by 6x the $40m or $240M, 10x the amount of the actual stock move!  (If you use the 22m share base you still get substantial potential upside-- perhpas $10 of upside,and you get to lower the debt).

    SubjectRE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:29 PM
    Memberlordbeaverbrook
    good luck with your trade.

    SubjectRE: RE: RE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:37 PM
    Membercuyler1903
    Otto - Hell yeah, perfect for the IRA.  Buy a little, maybe it goes to zero, maybe there's a huge rip and you make 10x.  It's not going bankrupt tomorrow.  Just read the presser and sounds like this is the low point for liquidity which will only expand as the year goes on.
     
    Probably great for a spec trade.
     
    Cuyler

    SubjectRE: RE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:39 PM
    Memberotto695
    thanks....there are no believers on this yet and huge short interest relative to float.  just seems like the worm could be turning and if it fully turns (or even partly turns) on this one, there is alot of upside.  YRCW did $800m/ebitda per year back in the day.  We're only talking about $325m this year and $375-$400M next.  Going from $400M to 800M in ebitda (or even part way) is alot of potential upside on 8m shares out (or 22m with the converts) .  Not without risk, for sure, given leverage.  But i like the trajectory its going in right now....

    SubjectRE: RE: RE: RE: RE: RE: time to discuss as a long?
    Entry05/03/2013 03:44 PM
    Memberotto695
    cuyler, yeah, not a big position, but not that small either in my opinion, as the setup seems really good here, at least for the next few quarters.  1Q was low water mark for liquidity and also for OR and with extra cost saves upcoming (on top of normal seasonal pattern) and beginning to look out to 2014 ebita within 6 months, along wth great psychology setup (everyone hates it, no analysts on board yet, short interest), the risk/reward ceratinly seems worth it....if you listen to cc, i think you'll find tone was very positive and mgmt in PR and conf call indicated there is alot more to do.  ODFL runs an OR in the mid 80s.  YRCW will never get that low because of its union, but has a decent chance to get to low 90s over next 12-36 months.

    SubjectMilking the cow
    Entry05/03/2013 04:53 PM
    MemberMencken
    Same reason why Management teams in all value traps "keep going" -- a paycheck, a title, and a corner office with a secretary.

    SubjectRE: RE: RE: over the line. mark it zero, dude
    Entry05/05/2013 11:42 PM
    Memberotto695

    Some follow-up to Rskfrarb's points:

    1.  it seems clear to me from your example (not mine) of SWY that the equity value of companies with enormous MEPP obligations (SWY has  a$7B MEPP obligation) can still increase significantly due to operational performance alone.  Just look at SWY over the past 8 months-- the equity value increased 80% over that time frame as operational improvement finally kicked in, before they reported a downtick in (again) operational performance (in other words, the +80% move followed by the -20% downtick was all operationally driven, no change in MEPP during that time).

     

    2.  If you look at the Owl letter from 2010 and compare it to today, one would have to conclude that there is now a glimmer of light there for equity holders.  3 years removed from the Owl letter, we have a company with a high probability of $400M in EBITDA versus $0 in 2010. If YRCW can get EBITDA up to a say $600m in EBITDA (only 75% of prior operating levels of $800M) over the next few years, and assuming that they normalize capex back to $200M/year from the current levels of $80M/year, they could generate roughly $240M in free cash flow or $30/share in FCF per year (on $10 stock!!!!!)  ( I am subtracting the $160M /year in interest expense, but I am not subtracting any cash taxes here since that won't happen for a long, long time). 

    How can this equity be worth only $10/share in that scenario?  Investors will look at the $10B MEPP and probability weight the real liability there.  Firstly, from what i have read there is some question as to whether the $10B is really $10B or if it is closer to $3B using "smoothed actuarial calculations".  Secondly, if (when?) interest rates go up or if equity values continue to rise that obligation goes down, Thirdly, with that level of FCF, they will pay off the debt on 3-4 years and start building huge cash against the MEPP afterward.  Lastly, there is always the possibility of a deal with the union (though admittedly this less likely if company is doing this well).

     

    Note: you could play around with the capital structure a bit and assume 22m shares instead of 8, but you can also assume that FCF goes to $400M/year pretax over time since cash interest will disappear very quickly as they pay down the debt. 

     

    Consider also the possibility of them getting to $800M/year in ebitda.... the quarter they just reported was a 500 bip improvement in the OR.  what if they do that for 2 more years?  guess what, they will be at $800M/year in EBITDA.  I am assuming they have much more incremental improvements in OR than what they just reported.  Again, i am just saying-- this is not impossible, but lets leave that aside for now.....

     

    In short, there appears to be a glimmer (perhaps a bit more than a glimmer?) of hope for euqity holders over the medium/long-term and other companies with enormous MEPPs can still see significant equity appreciation from operational improvement in teh short run, despite these seemingly insurmountable OBS obligations.  And mostly i really just want to provoke more discussion on this.   Given operational improvement/trajectory right now, i cant see how there is more than a couple dollars of downside here over the next few quarters (this stock was $13-$18 just 14-18 months ago on much worse fundamentals) and if the sell side and other investors begin to believe the scenario I have outlined above has a chance--even just a small chance-- of unfolding, the upside is just so huge on this share base....Again, $30/share of FCF on a $10 stock!!!


    SubjectRE: RE: RE: RE: over the line. mark it zero, dude
    Entry05/06/2013 08:23 AM
    Memberlordbeaverbrook
    otto -- do you know what interest rate is being used in central states and the other plans?  if you are truly interested in the intrinsic value of YRCW (but i think you are only concerned about a trade/greater fool, etc.)... you should do some more homework on MEPP... and look at the ridiculous assumptions in some of these plans.

    SubjectWow...YRCW
    Entry06/25/2013 02:09 PM
    Memberangus309
     
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