The deal is the first under a $17 billion loan program approved as part of the broader stimulus by Congress in March. That pot of money was earmarked for firms deemed “critical” to U.S. national security. Congress gave Treasury the authority to approve more than $500 billion in emergency loans to companies and cities, although most of that money has not been disbursed.
“We are pleased for Treasury to make this loan pursuant to the CARES Act,” Secretary Steven Mnuchin said in a statement. “This loan will enable a critical vendor to the Department of Defense to maintain significant employment while providing appropriate compensation to taxpayers.”
YRC Worldwide is a publicly traded company headquartered in Kansas. With a fleet of about 7,600 tractors and 30,000 trailers, YRC is one of the largest “less-than-truckload” transportation companies in North America. The 96-year-old company covers 68 percent of the military’s services in that area, according to the Treasury Department’s announcement.
The investment could intensify questions over Treasury’s handling of hundreds of billions in taxpayer aid at a pivotal moment for the U.S. economy. Some critics have said Treasury’s interventions amount to a large corporate bailout for undeserving firms, while others have argued the money should be more swiftly distributed with fewer conditions to avert rising unemployment. Treasury did not spend any of the $17 billion for more than three months, raising questions about the program’s effectiveness as companies sought other means of funding.
The Cares Act requires that companies receiving help through the fund give the government an equity stake or a warrant, a financial instrument that allows the lender to claim stock at a later date.
Wes Hallman, vice president at the National Defense Industrial Association, said he is aware of approximately 20 companies that applied for relief through the fund, a relatively small number for a massive, sprawling industry. Most defense contractors considered the terms too onerous, defense executives and lobbyists told The Washington Post.
“There are too many bells and whistles going in the wrong direction, and major aerospace companies just aren’t interested” in the fund, said Arnold Punaro, a retired Marine Corps general who works as a defense consultant. “If this were a good deal for our aerospace companies, they would be using it.”
Although many companies were financially desperate as the crisis deepened in late March and early April, many of them found other options. Numerous defense contractors found relief through other Cares Act programs. A handful of defense suppliers received Paycheck Protection Program loans backed by the Small Business Administration, which have no equity requirement and have the option of being forgiven.
The Defense Department is spending $668 million in Defense Production Act funding on the defense industrial base. That funding is being meted out through existing, open contracts that don’t have to be renegotiated and don’t require any equity stake.
With capital markets improving throughout April and May, some companies found other options through private markets.
“When the Cares Act passed, most defense companies looked at the program as an option, but most determined that the conditions associated with the loan program were so restrictive it made obtaining capital through other means a better option,” said Jeff Green, a lobbyist who works with several defense firms that considered applying.
One company that passed on government help is Boeing, the battered aerospace manufacturer and defense contractor whose finances have been wrecked by the global slowdown in commercial air travel. Mnuchin and people involved in the drafting of the Cares Act have said the $17 billion pot of money was initially intended in large part to help shore up Boeing. However, the company was able to raise sufficient funds to stay afloat through the private credit markets, which were aided by the Federal Reserve’s extraordinary measures, although the company has also laid off thousands of workers.
A Treasury statement said the loan will allow YRC to keep about 30,000 trucking jobs and “continue to support essential military supply chain operations” used by more than 200,000 companies in North America. The department also cited a certification from the defense secretary about YRC’s critical value for national security. The agreement includes limits on executive compensation and dividend payments to shareholders, but Treasury has not disclosed what those are.
Like most transportation companies, YRC was sharply affected by the state-by-state business closures that put the national economy into stasis throughout March and April. The company finished the first quarter of 2020 with $1.15 billion in revenue, down slightly from the same period last year. Lower volume across its commercial freight business has cut into the company’s bottom line, forcing layoffs and other cost-cutting measures. But the company’s debt is a larger concern; YRC owes $825 million to various creditors, according to its most recent financial statement.
In a May 5 call with analysts, YRC chief executive Darren Hawkins thanked employees for keeping the U.S. supply chain moving despite “the invisible enemy,” echoing a term commonly used by President Trump. He declined to take questions from analysts, marking a significant break from usual practice.
“I don’t know of a more patriotic industry than trucking, and that spirit has stood strong in America’s transportation networks,” Hawkins said.
In a news release, Hawkins thanked Congress and the Treasury Department for providing financial assistance to see YRC through the crisis. “This financial assistance will enable us to bridge this pandemic-related crisis and continue to provide essential shipping services for the nation’s supply chain,” Hawkins said.
While it is unusual for the U.S. government to acquire parts of companies, such arrangements are common internationally and help governments ensure that taxpayers receive a return for their investment. If the price of YRC’s stock goes up, taxpayers will also benefit as a traditional investor would. “During this crisis, the government should not let companies fail, but it also should not bail out the wealth of their owners. Providing loans for equity accomplishes exactly this,” said Matt Bruenig, founder of the left-leaning People’s Policy Project.
The agreement will probably lead to criticism that U.S. taxpayers are providing special assistance to firms that should not receive help. Darrick Hamilton, a professor at Ohio State University, noted the emergency help comes as protesters in major U.S. cities are calling for cuts to spending on the police and the armed forces. The U.S. government already provides more than $700 billion annually for the military.
“The government is supposed to be dealing with social welfare but is spending money on militarization and policing,” Hamilton said. “This is indicative of our general values of where we spend our money."
Magda Jean-Louis contributed to this report.