The commission overseeing the distribution of federal money provided to businesses negatively impacted by the pandemic said that it has yet to hear from the Defense Department regarding a request for more information on its designation of less-than-truckload (LTL) carrier YRC Worldwide (NASDAQ: YRCW) as a “business critical to maintaining national security.”
In a Thursday report, the commission said the Defense Department’s Sept. 2 letter stated it expected to have a response ready by Sept. 18. As of Thursday, the commission hadn’t received a response to its initial or follow-up queries.
On July 1, YRC announced that it would receive a $700 million Coronavirus Aid, Relief, and Economic Security Act (CARES Act) loan from the Treasury Department to repay short-term obligations and fund capital expenditures (capex) on tractors and trailers. The department used the national defense designation provided under a subtitle in the lending program, which requires either the secretary of defense or the director of national intelligence to recommend and certify that a company meets the standard.
It was Defense Secretary Mark Esper that gave the OK.
The commission is seeking understanding of the Defense Department’s “national security” designation to a carrier that hauls 68% of the department’s LTL freight, which consists of items like food, electronics and domestic military supplies. Further, they want to know if replacement service with another carrier was sought.
A July 20 report from the commission called into question the Treasury’s decision-making as well. The group is attempting to determine if the department’s use of the national defense provision was used appropriately and if YRC’s “precarious financial condition at the time of the loan” placed an undue risk burden on taxpayers. Other concerns include the commission’s perception that the interest rate on the new loan was too low and that the deal may be undercollateralized.
A July 30 response from the Treasury Department said the lending program contained vague guidelines as to which businesses would qualify and that it established guidance for qualifying companies in April, which YRC later met. The department pointed to a 30% decline in YRC’s shipments from mid-March to mid-April as creating a “liquidity crisis” and that a bankruptcy filing would be imminent, leaving 30,000 unemployed and “undermining the economic recovery,” if relief wasn’t provided.
The Treasury Department said the company passed all of the underwriting criteria and that the interest rate was modestly higher than those issued on other pandemic relief loans. Treasury pointed to $1.6 billion in pledged assets and the government receiving a 30% equity stake in the company as adequate collateral.
However, the Treasury’s first explanation didn’t pass muster with the commission, prompting additional requests for information from both the Treasury and Defense departments.
The Treasury Department appears to be working with the commission. “The Treasury and the commission are in the process of coordinating the transmission of additional confidential materials responsive to the commission’s questions,” the commission’s latest report stated.
The department has made only one loan from the $17 billion available under the “national security” carve out. YRC CEO Darren Hawkins was named to the president’s Great American Economic Revival task force in April and former YRC Chairman and CEO Bill Zollars was appointed by the president and confirmed by the Senate to the U.S. Postal Service board of governors in June.
YRC reported in its second-quarter filing with the U.S. Securities and Exchange Commission that it has used $245 million of the $300 million allocated under the first tranche of the loan for the repayment of deferred health, welfare and pension payments. At the time of the Aug. 3 filing, the carrier hadn’t drawn any of the funds from the $400 million second tranche, which is allocated for equipment capex.