Fitch Ratings has affirmed the ratings of YRC Worldwide Inc. (YRCW) as follows:
--Issuer Default Rating (IDR) at 'CC';
--Secured credit facility rating at 'B-/RR2';
--Senior unsecured rating at 'C/RR6'.
In addition, Fitch has withdrawn all ratings on YRCW's YRC Regional Transportation, Inc. subsidiary. YRC Regional Transportation has no rated debt outstanding, and Fitch does not expect the subsidiary to be an active issuer in the future.
YRCW's ratings apply to a $714 million secured revolving credit facility, a $257 million secured term loan and a total of $71 million in senior unsecured convertible notes.
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. Although operating cash flow improved sequentially throughout 2010, free cash flow remained negative for the full year despite very low capital spending and the deferral of most interest and fees associated with the company's bank facility and asset-backed securitization (ABS) facility. The company also is not currently contributing to its multiemployer pension plans sponsored by the International Brotherhood of Teamsters (IBT). 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.
During 2010, YRCW experienced improvement in its overall operating performance, especially in its Regional Transportation segment, which has benefited from a turnaround in the Upper Midwest auto industry. In the fourth quarter of 2010, Regional Transportation's tonnage per day increased a relatively solid 14% year-over-year, while the unit's revenue per hundredweight (revenue/cwt.) grew 1.6%, demonstrating the improving demand conditions in its core markets. The improvements in both measures drove overall revenue at the unit up nearly 17% and were responsible for a 3.9% increase in YRCW's consolidated revenue in the quarter. The National Transportation unit continued to struggle, however, with daily tonnage down 7.7%, although revenue/cwt. rose 4.2%. National Transportation's revenue declined 2.5% in the quarter, and with the unit comprising about two-thirds of the company's consolidated revenue, continued weakness in the unit's volumes will weigh on YRCW's top line until tonnage levels improve. Looking into 2011, Fitch expects YRCW's business levels and revenue to strengthen modestly throughout the year along with an improving U.S. economy. However, customer concerns over the company's financial condition are likely to put some pressure on revenue growth, at least until the proposed recapitalization is completed.
The proposed recapitalization transaction is included as a requirement in the most recent amendment to the company's concessionary labor agreement with the IBT. The amendment defines a qualifying transaction as one that reduces the amount of the company's bank debt by at least $300 million. YRCW is required to enter into a memorandum of understanding (MOU) with its bank group for a qualifying transaction by Feb. 28, 2011, in order for the concessions agreed to by the IBT to remain in effect. In addition, the company and the bank group must have final documentation for the transaction completed by March 15, 2011, and the transaction must close by May 13, 2011. Meeting these milestone dates is a requirement for the company's labor agreement and its multiemployer pension plan contribution deferral agreement (CDA) to remain in effect. Meeting these dates also is a requirement of the most-recent amendments to the company's credit facility and ABS agreements. 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.
No details have been made public regarding how the recapitalization transaction will be structured. Therefore, the effect that the transaction will have on YRCW's ratings, if successfully completed, is unclear. Although a debt to equity swap with the banks would reduce the company's debt and leverage, it would do little to help the company's near-term free cash flow, although it would ultimately reduce interest costs and likely would help to convince certain of YRCW's customers that the company was on a sounder financial footing. More positive for the company's credit profile would be a transaction that materially improves the company's liquidity position in addition to reducing its debt. Additional liquidity would increase the company's financial flexibility as it gains traction on volumes and continues to restructure its National Transportation business. Notably, on its fourth quarter earnings call, management dismissed the idea of splitting up the National and Regional Transportation businesses, suggesting that a sale of one of those units as part of the recapitalization transaction is unlikely.
Aside from the recapitalization transaction, YRCW has been working with the IBT over the past two years to reduce costs and increase work rule flexibility. It also has reached an agreement with the union on an extension of its labor agreement by two years, with the current contract now expiring in 2015. The changes to the labor agreement have contributed to a decline in the company's labor costs, with salaries, wages and employee benefits declining to 60% of revenue in the fourth quarter of 2010 from 63% of revenue in the year-earlier period. With the most-recent agreement, YRCW also is slated to begin contributing to its multiemployer pension plans in June of this year, with the company estimating that contributions according to the revised agreement will run at a rate of around $7 million per month. Management hopes that it can offset the effect of the contributions with better labor productivity. Fitch views the changes to wages and work rules that the company has achieved as a positive, however, the severely underfunded position of the multiemployer pension plans remains a risk that ultimately could drive up the company's required contributions. Although information related to the funded status of the plans is not readily available, the company noted in its 2009 Annual Report that its contingent liability with respect to a full withdrawal from all of the multiemployer plans would be an estimated $7 billion.
Despite the improving market conditions and lower cost structure arising from the IBT agreement and the restructuring of the National Transportation segment, YRCW's credit protection metrics remain very weak. The company ended 2010 with $1.07 billion of debt (face value), including $338 million of lease financing obligations and $139 million of pension contribution deferral obligations. The company produced negative free cash flow (calculated as net cash from operations less capital expenditures) of ($18) million despite very low capital spending of only $20 million. Net cash from operations for the full year was only $1.1 million. Fitch estimates that funds flow from operations (FFO) adjusted leverage was about 9.2 times (x) at year-end 2010. Fitch expects YRCW's credit profile will improve somewhat over the course of 2011, even when excluding any effects from the proposed recapitalization transaction, as operating leverage leads to increased margins on higher business volumes. Certain of the company's credit protection metrics will be strengthened further if the recapitalization is successful.
Liquidity at year-end 2010 totaled $196 million, including $143 million in cash and $53 million in unrestricted revolver availability. Another $71 million of restricted revolver availability was potentially available to the company with the permission of the banks. In the face of negative free cash flow, liquidity was supported over the course of the year largely through asset sales and sale-leasebacks, with proceeds from property disposals totaling $86 million. The company also realized $34 million in proceeds from the sale of its YRC Logistics business. In 2011, liquidity will continue to be challenged, as the company has $223 million in debt maturities coming due over the course of the year, including $123 million of ABS borrowings. YRCW also plans to spend between $150 million and $175 million on capital expenditures during the year, although it is unclear to Fitch that the company will have sufficient liquidity to invest at this level. Management has forecasted additional property sale proceeds of $40 million to $50 million in 2011, and, after availing itself of recently-enacted pension relief legislation, it expects to contribute $30 million to its non-union pension plans.
Arkansas Best Freight System Inc. (ABF), one of YRCW's competitors and a unit of Arkansas Best Corporation, has filed a lawsuit in Federal court alleging that the various concessionary agreements entered into between YRCW and the IBT violate the National Master Freight Agreement (NMFA). The NMFA is the predominant labor agreement between the IBT and trucking companies employing the union's members. ABF is seeking to nullify the revised IBT agreements with YRCW in addition to seeking $750 million in damages. In December 2010, the lawsuit was dismissed on the grounds that ABF did not have legal standing to sue. In January 2011, ABF filed an appeal, which media reports suggest could be heard as soon as April of this year. 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.
The rating of 'B-/RR2' on the company's secured credit facility reflects its substantial collateral coverage and superior recovery prospects in the 70% to 90% range in a distressed scenario. On the other hand, the rating of 'C/RR6' on the company's unsecured convertible notes reflects Fitch's expectation that recoveries on those notes would be poor, in the 0% to 10% range in a distressed scenario. The low level of expected recovery for the unsecured debt is due to the substantial amount of higher-priority secured debt in the company's capital structure.
Additional information is available at www.fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Applicable Criteria and Related Research:
--'Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports)' (Dec. 20, 2010);
--'2011 Outlook: U.S. Transportation' (Dec. 17, 2010);
--'Evaluating Corporate Governance' (Dec. 16, 2010);
--'Analysis of U.S. Corporate Pensions' (Dec. 1, 2010);
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'Equity Credit for Hybrids & Other Capital Securities - Amended' (Dec. 29, 2009);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 29, 2009).
Applicable Criteria and Related Research:
2011 Outlook: U.S. Transportation
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=589105
Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=520046
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
Equity Credit for Hybrids & Other Capital Securities - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Analysis of U.S. Corporate Pensions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405
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