YRCW May Violate Bank Covenants

May 13, 2009
There is a “substantial risk” that YRC Worldwide could be out of compliance with earnings requirements contained its credit facilities in the second quarter of 2009.

Early in its 115-page filing with the Securities Exchange Commission, YRC Worldwide (YRCW) notes there could be a “substantial risk” that recent cost cuts and volume increases may “not be achieved in sufficient time to meet [YRCW's] minimum EBITDA requirement in its credit facilities for the second quarter of 2009.” Should it fail to achieve minimum earnings before interest, taxes, depreciation and amortization (EBITDA) YRCW says it would need to “seek a waiver or forbearance from [its] lenders and lessors.”

A report from equity analyst firm Stifel Nicolaus questions YRCW's ability to achieve its goals of returning to profitability. In the report, David Ross states, “We have a difficult time seeing how the math works here to restore the company to profitability.” He cites the wage reduction and deferral of pension payments YRCW has already undertaken. Other carriers, says Ross, are seeing seasonal increases in freight volumes of roughly 5% while YRCW was reporting flat to slightly increased volumes.

YRCW responded to reports of the filing saying: “At YRC Worldwide we are making significant progress in strengthening our competitive and financial position.

“With our unrivaled networks, we are well-positioned to continue providing service that is simply reliable.

“On the financial side of our business, we are confident that we are taking the right steps by actively managing cash flow and engaging in constructive discussions with our lenders so that can continue to meet our obligations and serve our customers.

“As we manage through the current challenging environment, we continue to deliver on our commitment to provide outstanding service, and we look forward to doing so for many years to come.”

Among the positive steps YRCW notes in its SEC filing, it says it has completed the integration of Yellow Transportation and Roadway into a single network branded YRC. Since the integration, says YRCW, service has improved relative to both on-time deliveries and claims. Productivity measures have also improved, says YRCW, including load average in the line haul operation, city pick up and delivery route productivity and dock labor productivity.

The company stated that it believed shippers had diverted freight from YRCW companies out of concerns over the integration and possible risks relative to YRCW violating its bank covenants. The latter, it said, were largely mitigated by the February amendment to its credit facilities, said YRCW. It also said that as service improved following integration, the company saw shipments increasing.

The 10-Q filing states, “However, we cannot predict how quickly and to what extent these volumes will return. Our increasing number of shipments and cost actions has partially offset our revenue decline from the poor economy, but further cost reductions, which are underway, and further shipment increases are needed to address the revenue decline for the compnay to meet its EBITDA requirement in its credit facilities in 2009. The company believes that there is a substantial risk that these cost reductions and shipment increases would not be achieved in sufficient time to meet its minimum EBITDA requirement in its credit facilities for the second quarter of 2009.?

The YRCW filing also noted the company had entered “constructive discussions” with the agent for its lending group about a possible amendment to the credit facilities prior to the end of the second quarter.

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