3 Roads Left for YRC Worldwide, Inc. and Each Looks Dangerous

It's been three weeks now since YRC Worldwide (NASDAQ: YRCW  ) CEO James Welch made his case (link opens a PDF) for why YRC workers should approve a new union contract. Three weeks since YRC's boss warned his workers that "lenders will not refinance our debt unless we have a 5-year labor agreement" in place. He also said that without refinancing, the company cannot satisfy all of the $1 billion in debt payments coming due in the next 17 months. Welch stated, "Refinancing typically takes approximately 90 days to complete and it must be completed before the first of our debt repayments becomes due -- so we must start the refinancing process by November 15."

And yet, 11 days past that deadline, what progress has YRC made? Nada. Nothing. Zilch. No agreement.

Parked YRC trucks. How appropriate. Source: YRC Worldwide

What's the hurry?
The first in a long line of bond debts comes due Feb. 15 -- ($69 million and change). YRC only has $170 million in the bank, though, so paying just the first of these bills will leave it with only $100 million and change... and $1.3 billion in debt still to pay. The way I see it, YRC really has only three viable roads ahead of it, and the longer it takes to "pick a lane", the narrower its choices become. YRC essentially has three options before it.

Admit defeat, and declare bankruptcy
Hey! Don't shoot the messenger. YRC's own CEO raised the specter of bankruptcy earlier this month -- and not without reason. By its own admission, YRC needs 90 days to work out a deal to roll over its debt. But it's only got 80 days left to work with. Mathematically speaking, that's a bad situation to be in.

Recapitalize the debt
If YRC needs a deal with its workers to roll over its debt, but it can't get a deal, and so cannot roll over its debt, then the company's just going to have to pay the debt when it comes due. That sounds impossible, but it's not. YRC could raise the cash it needs by issuing new shares.

Granted, issuing enough shares to pay off $1.3 billion, at $8.80 a stub, would require that YRC flood the market with more than 147.7 million freshly minted stock certificates. That would dilute existing shareholders out of about 93.5% of their stake in the company. (And that's the good news. Chances are slim that anyone would pay $8.80 a share for a company that's about to issue such a massive dilution. My guess: In the event of a recap, we're looking at a near total wipeout of existing shareholders).

Cut wages
YRC may tell its workers that all it needs to survive is a new five-year contract guaranteeing "predictable future wage and benefit increases". But the truth is that that won't cut it.

YRC's compensation levels today are right in line with industry standards. Expressed as a percentage of revenues, YRC's sandwiched in between the lower cost of FedEx's and Old Dominion's non-union workers, and the slightly higher costs of UPS's and Arkansas Best's unionized labor forces.

Yet despite this, YRC can't seem to earn itself a profit. So what's the solution?

Assuming the company doesn't want to go bankrupt, or wipe out its investors (for the second time in two years!), it's going to be forced to demand significant wage and benefits cuts from its workers.

But if YRC were paying salaries, wages, and benefits (relative to revenues) closer to what rival Old Dominion pays out, for example, this would reduce its revenue outlay on this expense by about 12%, saving the company upwards of $330 million annually, and returning YRC to profitability -- even at current interest rates on its debt -- and permitting the company to repay that debt. Chances are, that's a prospect its bankers could get behind in less than 90 days.

No joy in Mudville
And there you have it, folks. There are the three roads that YRC must choose from. Each ends in tears for someone. The only question left is who will be crying in the end?

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 26, 2013, at 8:56 PM, mrdaryl30 wrote:

    ive been entangled in this from the begining and i beleive your commets on our pay wages are in correct. i would know i am there . we make 20. and change per hour. ups is well up to 10. dollars more per hour ups freight [overnite] is at 27 per hour and change, old dominion is at 25 and change, we at yrc are the lowest paid hourly workers in the industery. let me reitterate that we yrc workers are the lowest hourly paid workers i could not imagine our pay being cut any deeper. not to mention a lot of us had to leave our homes and families and move to forien cities to live after this last change in may 20th and take on another financial burden of paying for another rent in a apartment besides our own morgatge. please when you report please do not bypass all the sacrafices we have made money pension and additional liveing expenses. mr welch has to understand we have nothing elese to give up nothing . their desisions have bankrupt us workers,in our lives. talk to us not mr. welch see what thry have done to thousands of workers. remember we have taken 2 pay cuts. and pension cuts. we gave them the money they asked for and they went on a spending spree and spent it acording to mr. welch now they want more and more, and the lies continue. thank you daryl

  • Report this Comment On November 27, 2013, at 9:21 AM, Mustang6147 wrote:

    The current give backs are enough to put Teamsters in the lower tier wage group in the transportation industry.

    The give backs outlined in the companies current demands puts the Teamsters at YRC below a Walmart worker. This is alarming because the Union has an ongoing effort to organize Walmart based on wage security and benefits.

    The amount of propaganda that Mr Welch has mailed out to me is enough to cause me to up my trash pickup allowance for the week which is causing me a larger then normal outlay of money each month. SO please stop sending me crap.

    We have to vote no, it has become to easy for the company to make outrageous claims that are simply not supported.

    Bad management as stated in the J.O.C. is the reason for YRC woes. The union workforce is the reason we are still here.

    Do your job Welch, or BOOT IT !

  • Report this Comment On November 28, 2013, at 3:27 PM, floyd63 wrote:

    Sure. YRC wants to put a bandaid on a massive problem for another year so more of us workers can go bankrupt, or surely ruin our good credit. There is no bandaid big enough to fix their equipment's holes. They are becoming a menace on the road. The best they can do is close the doors instead of dragging this on.

  • Report this Comment On November 28, 2013, at 8:26 PM, skipdawg wrote:

    I am not convinced that securing a 5 year extension will overall help in the long run. After being at one of the (profitable) regional carriers under YRC's wing. (Regional divisions are operating at a 95, not to shabby for companies tied down with the albatross which has always been Yellow), i'm under the impression that they are not interested in recovering. Wasn't this the same YRC that was in talks to acquire ABF some three-four months ago? Stocks were at 35-40 bucks a share? The timing is a bit too convenient, and most of the rank a file employees still have decent memories. If they wanted our help .... it seems like they have not really earned the trust, respect or loyalty that they feel entitled too. The history that Yellow has had in dealing with companies they have purchased (Preston .. closed, Jevic ... closed, Roadway .... absorbed, after being told that they would remain separate ... amongst others) shows that operating a company interested in hauling freight and goods to obtain profit is not the prime goal .... acquiring and liquidation is. The general rank and file is pretty well fed up. And, most feel that this is by design. Three rounds of concessions have been MORE than ample from the employees .... who move and haul the freight, dispatch the runs, maintain standards of equipment; have MORE than done they're share. Management has continually used failed models of business (acquiring companies they can't afford, failure change of operations that cost money to put together, salaries from execs which are far from earned .... if I did my job that poorly, I would expect to be fired). At some point, the cards need to be on the table. It is just shameful that they are pulling the livelihoods of so many down with them.

  • Report this Comment On December 02, 2013, at 4:34 PM, oldschoolltlguy wrote:

    There is a 4th way out for at least part of the group. The regionals - Reddaway, Holland and New Penn are viable companies. An investment firm could come in and want to buy them, but not YRC. This would be tough to do, but not impossible. The current, new investors and YRC could come to an agreement that for $100 million they would buy the regionals - once YRC files for bankruptcy and shuts down the long haul YRC Freight.

    This would allow the current investors to get something out of the money, and keep the group that is making a profit moving freight and their jobs intact - under new management.

    It has been done for other companies - why give it a try - nothing else seems to leave a path to save some of the company in an industry that would be stronger without YRC.

  • Report this Comment On December 17, 2013, at 12:38 PM, sincitytrucker wrote:

    wheres the billions we already gave back?operating expenses.

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