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.
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).
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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