Thursday, December 31, 2009

YRC Worldwide shareholders now own 5%...but of what? (YRCW)

Thank goodness for some interesting news today!

Trucking firm YRC Worldwide (YRCW) completed a debt exchange in the nick of time.  No seriously, they had $20million in lender interest and fees due today.  Had the exchange not been completed, the company would be headed into bankruptcy.  The interesting thing is that due to the conversion terms, this basically IS a bankruptcy, in that that debtholders are now equity holders in charge of the company.

After the exchange, existing common stockholders will own about 5% of the company.  Based on the current stock price of 85cents, the company's current market value is about $51million.  Divide that by .05 and it implies the entire company is valued at a little over $1billion.  The question is, what is a recapitalized YRC worth?   They're struggling to survive right now, and expected to continue losing money.  A look back at previous years' results gives us an idea of what the market is pricing in.  If they were to make 2006-type earnings of $270million, then yes the current stock price is dirt cheap at four times earnings.  But that shouldn't be assumed, as this flirtation with bankruptcy has severely hurt YRC's reputation.  While some companies can operate just fine with the threat of bankruptcy in the air, a company like YRC cannot.  Customers would be rightly petrified of losing their cargo in YRC's vast transportation network in the event of a liquidation.  Cost cuts likely won't be a magic bullet either, amounting to 15% of wages.

YRC had trouble convincing debt holders to agree to convert to equity for a number of reasons.  Some holdouts believed (rightly) that they'd fare better in a liquidation than an exchange for equity.  With 2023 convertible bonds trading as low as 30cents on the dollar in recent months, they were probably right:

The bonds now trade hands above 50cents on the dollar, as they will become the new owners of a much healthier capitalized YRC.

Among other reasons that bondholders agreed to the exchange might be fears from THUG TEAMSTERS, who planned to picket outside bondholders' offices simply because the firms were standing up for their legal rights:

Not to worry, this thuggish union continues to hold sway at YRC.  The terms of the exchange add another possibility of 20% equity option dilution to be handed out to Teamster members:

So, invest in the common stock or not?  I will choose not to, but there could be good upside.  The debtholders cleared the way for a much healthier company going forward.  Yes, they basically control the entire company now, but one can buy stock right now that discounts a lot of bad news.  For speculative investors, this could be a five-bagger (+500%).  This kind of position is interesting, as you could put in 1% of your portfolio, with downside of 1% and upside up 5% plus...I'll revisit this situation over the next few days.

Copyright 2009 AlphaNinja

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