The struggling trucking company YRC Worldwide Inc. (YRCW) is suffering from a serious bankruptcy threat. In its annual report that was filed last Monday, the company declared that it missed a restructuring milestone in the previous week. This may prompt the company’s lenders to declare YRC Worldwide to be in default on its credit agreements. If this actually happens, management has no option but to seek protection under the U.S. Bankruptcy Code.
During the last two and half years, YRC Worldwide is reeling under possible bankruptcy attributable to significant fall in freight volume as a result of severe global economic recession coupled with its highly leveraged balance sheet. The company’s viability depends on its ability to become profitable but unfortunately we do not expect the company to reach that stage any time soon. The trucking industry is highly competitive. YRC Worldwide is gradually loosing market share to its competitors Arkansas Best Corp. (ABFS), Con-way Inc. (CNW) and Knight Transportation Inc. (KNX).
In the previous month, YRC Worldwide entered into a deal with its creditors and labor union Teamsters Brotherhood to restructure its sagging finances. The lenders will inject fresh capital in return of equity capital and convertible debts. This will significantly dilute the wealth of the existing shareholders. Immediately after this announcement, Fitch Ratings announced that it could downgrade the company’s credit ratings as the rating agency considers the whole restructuring process as coercive debt exchange leading to ultimate loss for the investors.
As per Fitch, they placed YRC Worldwide’s issuer default rating (CC), secured bank credit facility rating (B-/RR2) and senior unsecured rating (C/RR6) on “negative rating watch”. If the deal matures, Fitch rating could downgrade the company’s issuer default rating from “CC” to “RD” indicating highly speculative and junk category.
We maintain our long-term Neutral recommendation on YRC Worldwide. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.