The rationale behind the $700 million pandemic-relief loan made to less-than-truckload (LTL) carrier YRC Worldwide (NASDAQ: YRCW) appears to be a likely topic during an upcoming commission hearing on the national security loan program established under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The seventh report from the congressional commission overseeing the distribution of federal loans made to businesses negatively impacted by the pandemic noted “serious concerns” with the YRC loan and said the “Department of Defense has yet to provide the commission a satisfactory explanation for how YRC is critical to national security.”
A $17 billion carve-out under subtitle A in the lending program allows a national security designation, deemed by the secretary of defense or the director of national intelligence, to qualify a company for relief. It was former Defense Secretary Mark Esper who recommended and certified that YRC, which provides 68% of the Defense Department’s LTL services hauling food, electronics and other supplies domestically for the military, met the standard.
The Defense Department said it has recommended and certified that 20 companies, including YRC, qualify under the national security standard.
The primary sticking points for the commission on the loan made to YRC have been the Defense Department’s designation of YRC as “critical to maintaining national security” and the Treasury Department’s underwriting of the loan to a company that was in “precarious financial condition” prior to the pandemic.
Defense Department draws commission’s ire
The commission said the Defense Department was slow providing a response and when one was provided it wasn’t sufficient. “The commission finds the Department of Defense’s delay inexcusable and its answers incomplete.”
The commission also has concerns that the Defense Department didn’t look to other LTL carriers for replacement service, noting that YRC is “merely the fourth-largest less-than-truckload shipping provider in the United States, and it is not the only provider of such services to the Department of Defense.”
“In short, the Department of Defense’s responses to the commission’s inquiries regarding why this company was deemed critical to maintaining national security raise more questions than they provide answers.”
Treasury’s decision still scrutinized
The $300 million first tranche of the loan was designated for the repayment of deferred health, welfare and pension payments. In its third-quarter filing, YRC reported that it has accessed the first $75 million of the $400 million second tranche, which is slated for the replacement of equipment. The carrier plans to take delivery of 300 new tractors and 950 new trailers before year-end, exhausting the remainder of the tranche in 2021. Self-funding equipment purchases and the associated expense reduction with operating new equipment is a significant cog in the company’s restructuring plan.
The Treasury’s underwriting and its determination of the terms and conditions of the loan have drawn the scrutiny of the commission, which noted the company “has been operating at a loss and has had poor credit ratings — both before and during the pandemic.”
The commission also found fault in the interest rates established on the loan and the Treasury’s lien position, which is subordinate to other creditors in the first tranche of the loan. Further, it believes the 30% equity stake the government received may ultimately be worthless, leaving the risk for loss of taxpayer money as “strikingly higher” when compared to other loans in the program.
The Treasury’s initial response addressed many of these items and spelled out the rationale behind the loan for YRC, which it described as the nation’s “second-largest” LTL carrier. The department said YRC met the standards — incurred losses due to the coronavirus, which created a liquidity crisis; met all of the criteria of the Treasury’s “credit test”; and pledged $1.6 billion in assets along with the equity stake as adequate collateral.
Treasury also contends that YRC was facing a strike and ultimately bankruptcy if its employees’ health coverage was withdrawn and that it was urged by both political parties to give YRC’s loan request “full and fair consideration.” The department said the interest rates were set 50 basis points higher than other loans made in the program and that the second tranche requires its approval of the quarterly capital expenditures (capex) plan before funds are released.
Public hearing date set
The commission said it was holding a public hearing on the national security loan program on Dec. 10 to “examine the funds authorized by the CARES Act that provide up to $17 billion for loans and loan guarantees to businesses critical to maintaining national security.”
Treasury Secretary Steven Mnuchin is expected to testify. The commission said it has also invited Director of National Intelligence John Ratcliffe and Department of Defense Undersecretary Ellen Lord. According to the report, Lord said she was unable to attend. Ratcliffe has yet to respond.
“Given these significant concerns, the commission believes it imperative that the public have the opportunity to hear from the officials involved in extending the YRC loan. The commission appreciates Secretary Mnuchin’s willingness to testify at [the Dec. 10] hearing regarding the YRC and other national security loans, and it strenuously encourages the Department of Defense and the Director of National Intelligence to also make themselves available.”
Citing frustration with the Defense Department’s lack of cooperation, the commission has asked the Treasury and Defense departments to provide it with copies of all communications between the two departments.