Trucking services firm YRC Worldwide (YRCW) was able to complete the necessary debt for equity swap with its bondholders in a deal that came down to the wire after six extensions were required. The deal will convert debt into 37 million shares of common stock and 4.35 million of class A convertible preferred shares, allowing YRC to avoid paying $19 million in interest payments and fees. Also, this deal will permit them to tap into $160 million from its credit facility which should enable operations to continue. Of course, management is heralding this as a means to a turnaround, but they will need to find a way to slow their cash burn quickly or it could be just a band-aid for a company that has lost $17 billion over the last 5 quarters.
Industry analysts such as David Ross of Stifel Nicolaus had speculated that if this agreement with bondholders the company would have been required to close its doors as early as this weekend. That cannot inspire confidence in the businesses who rely on YRCW to transport their goods, and whose merchandise would be in limbo if the company were to shutter operation. The negotiations with creditors have been made quite public over the past few weeks, with multiple extensions needed to come to agreement. Excess capacity in the transportation services sector would suggest that YRCW clients would be foolish not to at least investigate other alternatives in the event that they do need to file bankruptcy in the near future. Competitors of YRCW have reported business is improving so some may already have started to defect.
On Thursday morning, futures markets indicated YRCW would open higher thanks to the announcement that a deal had been reached. However, shortly after the open the stock took a dive and at the time of writing is down more than 16% because the deal is obviously highly dilutive to existing shareholders. Competitors of YRCW have taken a hit today as well, as the bankruptcy filing would have likely bolstered their sales. At Ockham, YRCW stock receives our Fairly Valued rating because it is already pretty close to priced in the prospect of bankruptcy. That being said, we cannot see a reason to believe that YRCW will soon return to profitability. It will surprise absolutely no one that this stock has significant risks involved, as without this eleventh hour deal, shareholders would have likely been wiped out.
YRC Worldwide will live to fight on another day, but the company still has a huge amount of debt and equity continues to dwindle. This company may still require reorganization through bankruptcy before all is said and done, but to this point management is taking every action possible to avoid it. Although looking at the overall sentiment towards the stock, it may be very challenging to convince investors that the writing is not already on the wall.