YRCW Suffers Another Setback

The struggling trucking company YRC Worldwide Inc. (YRCW) continues to suffer from one setback. after another. Last Monday, management announced that the company is suffering from a serious bankruptcy threat since it missed a restructuring milestone.

YRC Worldwide failed to satisfy its Pension Fund condition by the required date. This may prompt the company’s creditors to declare YRC Worldwide having defaulted on its credit agreements. If this actually happens, management has no option but to seek protection under the U.S. Bankruptcy Code.

Once this news came out, the rating agency Standard & Poor’s (S&P) Rating Services downgraded the corporate credit rating for YRC Worldwide. S&P characterized the company’s business risk profile as weak, financial risk profile as highly leveraged and liquidity as weak. The corporate credit rating of YRC Worldwide is downgraded to “CC” from “CCC-“. This implies S&P will now view all debts of YRC Worldwide as highly vulnerable instead of vulnerable.

During the last two and half years, YRC Worldwide has been reeling under possible bankruptcy attributable to a 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 losing 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 a coercive debt exchange leading to ultimate loss for the investors.

As per Fitch, they have 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.

Moreover, S&P too declared that they may further downgrade the corporate credit rating of YRC Worldwide to SD (Selective Default) if the company goes ahead with its equity dilution plan.

We maintain our long-term Neutral recommendation on YRC Worldwide. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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