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Company earningsFinanceLess than TruckloadNewsTrucking

‘National security’ designation for $700M YRC loan ‘amiss’

$300 million tranche to catch up benefits a ‘good faith effort’

The latest report from the congressional oversight commission monitoring COVID-relief loans, including the $700 million loan made to less-than-truckload carrier YRC Worldwide (NASDAQ: YRCW), finds shortcomings in the decision-making process on behalf of the Defense and Treasury departments.  

The main sticking points for the commission have been the designation of YRC as a company “critical to maintaining national security” and the Treasury Department’s underwriting of a loan to provide liquidity relief to a company in “precarious financial condition” prior to the pandemic.

A Dec. 10 hearing with commission members and Treasury Secretary Steven Mnuchin addressed many of the group’s concerns with Treasury’s underwriting of the YRC loan. Under Secretary of Defense for Acquisition and Sustainment Ellen Lord declined a request to attend that session but participated with commission members in a Dec. 18 teleconference.

The year-end oversight report scrutinizes the Defense Department’s decision to label YRC as a company worthy of the national security designation.

An inappropriate carve-out?

Subtitle A of the Coronavirus Aid, Relief and Economic Security (CARES) Act authorized up to $17 billion in loans to companies integral to the nation’s defense for “losses incurred as a result of coronavirus.” The statute, however, did not provide a description of what qualifies a company for the national security designation.

Mnuchin contends Treasury consulted with the Defense Department and the Office of the Director of National Intelligence to develop the framework for which companies would meet the designation. However, the report shows that both the Defense Department and the Office of the Director of National Intelligence have a different take on how the events played out.

“ODNI has informed the commission that it has not provided the Treasury with any recommendation and certification to designate a business as critical to maintaining national security and has not provided any input with respect to any DOD recommendations and certifications,” the report stated.

The Defense Department said it was “not involved in creating the guidance or definitions used by Treasury for its application process.” Further, Lord referred the commission back to Treasury for “additional analysis regarding the national security designation.”

Regardless of how the criteria came to be, it was former Defense Secretary Mark Esper who recommended and certified that YRC, which provides 68% of the Defense Department’s LTL services for the military, met the standard.

“The commission finds something amiss as to which agency was ultimately responsible for the national security designation. The commission believes the Treasury should have worked with DOD and ODNI to establish more specific criteria for determining what businesses were critical to maintaining national security and/or Treasury should have required DOD and ODNI to provide Treasury with more analysis than simply a statement that a business was critical to maintaining national security.”

Flaws in DOD’s procurement process

The commission’s queries revealed that the Defense Department relies on its prime contractors to oversee subcontractors, leaving the department with limited visibility. The commission referred to the process as “inadequate.” YRC is a subcontractor of Crowley Logistics, which is a prime contractor to the Defense Department. The commission expressed concerns that the department didn’t question Crowley about YRC’s financial health.

Part of the national security designation qualifying process included questions such as whether there are “alternate sources for the item a company supplies” and whether the product or service is “a commodity or commercially available item.” The commission said the Defense Department provided “a very weak case for YRC” as “there are many other companies that provide less-than-truckload services aside from YRC and services, like LTL trucking, could be considered a commodity.”

The Defense Department had previously answered that it did not talk to other LTL carriers for potential replacement service should YRC fail, another shortcoming in the commission’s view.

“The commission believes DOD should have used a more robust criteria and process for recommending and certifying that a business is critical to maintaining national security. Additionally, the commission believes DOD applies their national security designation inconsistently and encourages them to reevaluate their process in the future,” the report continued.

The commission said that the criteria used would have essentially made it possible for “countless” contractors and subcontractors of the Defense Department to qualify under the standard.

In total, the Defense Department recommended and certified that 20 companies met the designation for the national security loan program but Treasury made loans to only six of those companies.

As of Dec. 8, a total of $735.9 million in national security loans were made to 11 businesses, some of which qualified by having priority defense contracts or top secret security clearance. The program expired at the end of the year.

Treasury takes some heat

All along, the commission has had concerns that Treasury’s underwriting criteria “may have put the taxpayers in a precarious position.” Many of those issues were addressed at the hearing, but the report added some further suggestions and commentary.

The report again called into question Treasury’s underwriting standards for the YRC loan, stating that “upon careful review of the collateral detail, debt service and cash obligations contained in the attachments [the commission] doubts the reliability and adequacy of the underlying assumptions of cash flow and tangible asset values.” The report also noted that a downside revenue scenario was not conducted on any of the companies receiving national security loans and that the liquidity analysis used was not sufficient in determining if the loans would be repaid.

Mnuchin has contended that Treasury was encouraged by lawmakers to be aggressive with their underwriting guidelines and to take losses in the program to save jobs for companies facing a near-term COVID-induced liquidity crisis.

The report said that the $300 million Tranche A of the loan agreement with YRC covering deferred health, welfare and pension payments was a “good faith effort” and in line with the program’s intent to “provide funding in response to offset losses incurred by COVID-19.”

The report took exception to the $400 million second tranche of the loan, which is being used for the replacement of tractors and trailers. “This type of lending is beyond the scope of the CARES Act funding,” the report read. “The Treasury should better understand the underlying collateral when underwriting a loan and better measure the incurred losses caused by COVID.”

At the hearing, Mnuchin recommended that Treasury sell the YRC loan and liquidate the equity position at a profit. He said that Treasury does not want to be in the business of “lending to this type of company or any of the national security companies,” a suggestion the commission agreed with in the report.

Member pursuing White House ties to loan leaves commission

Bharat Ramamurti, an attorney appointed to the commission, stepped down from that role to join the Biden administration as the deputy director of the National Economic Council. Ramamurti was part of one of a very few contentious moments during the hearing, pressing Mnuchin on White House senior advisor Jared Kushner’s potential influence on the YRC loan and his “close ties” to Apollo Global Management (NYSE: APO). Apollo provided YRC with a $600 million loan in September.

At the time, Ramamurti said he would like to hold a separate hearing on the matter.

Mnuchin said no one from Kushner’s staff had reached out to him and that the loan was not a bailout of private equity. He said he would turn over any correspondence Treasury had with the White House to the commission. The report made no reference to the matter.

Click for more FreightWaves articles by Todd Maiden.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.

5 Comments

  1. Why was YRC given a 700 million loan when its company is only worth 70 million?????? While other companies were in dire need????????? Makes no sense , other than a waste of tax payers money. And who is really benefiting from this deal? It should be deeply investigated. Something is clearly amiss.

    1. Considering YRC was a huge contributor to the Trump campaign, the processing of this ‘loan’ makes perfect sense. Taxpayer dollars were given to a trash company that has been tanking for the last decade. This will never be paid back.

  2. As of 1/7/2021 yrc stock price is $4.67……Who in their right mind would give this company $700 million?? This deal smells from the head down. All the give backs and concessions the employees made and they get nothing back??

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