On-Again, Off-Again Rally at YRC Worldwide Inc. Is On Again

Another week, another chapter in the story of YRC Worldwide's (NASDAQ: YRCW  ) efforts to keep itself out of bankruptcy court.

Over the weekend, YRC management confirmed the news that shareholders have been waiting for: After voting 61% to 39% on Jan. 9 to reject a contract extending 15% wage cuts into 2019, union members have now voted 66% to 34% to approve essentially the same contract.

Teamsters President Jim Hoffa praised the result, saying it gives YRC its "best chance to stay in business and protect [union] jobs." But YRC still has work to do. As Teamsters National Freight Division Director Tyson Johnson pointed out, the company must proceed briskly to capitalize on the vote by undertaking "substantial debt reduction and refinancing initiatives."

That should now be possible. Five weeks ago, YRC sealed a deal with its lenders to convert more than $300 million in YRC debt into equity -- contingent on having the union's vote go through. With the vote in hand, YRC can proceed with its plan.

Indeed, YRC may go even farther than we've been led to expect. Commenting on the vote result, YRC CEO James Welch promised "a complete recapitalization" of the company. That might be a mere euphemism for rolling over the more than $1 billion in YRC debt not covered by the equity swap. Or it might mean something more ambitious.

What's next?
Indeed, we should probably hope it does mean something more ambitious. According to YRC, the debt-for-equity swaps already negotiated promise to cut YRC's annual interest payments by about $50 million. That might be enough to turn YRC's business free cash flow-positive -- but only just barely.

Ideally, YRC will try to use the breathing room (and higher stock price) it's gained from the union vote to trade an even larger portion of its equity for a reduction in debt. This would result in even more stock dilution to existing shareholders, true. But it would also pare back interest obligations even further, give YRC more financial room to maneuver, and allow YRC a chance to finally earn its first profit in seven years.

Because in the end, turning this business profitable is the only way to ensure its survival.

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