Moody's Revises Outlook on YRC Worldwide's (YRCW) to Positive on Notes Refi
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Moody's Investors Service ("Moody's") has assigned a (P)Ba3 rating to the $700 million first lien term loan that YRC Worldwide Inc. (Nasdaq: YRCW) plans to arrange as part of a refinancing of its capital structure. This refinancing is expected to include the exchange or conversion of Series B Convertible Notes into equity. Pursuant to its normal practice, Moody's is likely to recognize a limited default upon the exchange or conversion of these Series B Convertible Notes when this exchange or conversion occurs. Pending the completion of the refinancing, YRCW's Corporate Family Rating ("CFR") is affirmed at Caa3. Moody's has revised the outlook to positive from negative, as a successful completion of YRCW's refinancing has become very likely, following yesterday's announcement that union members voted in favor of a revised proposal to amend and extend its collective bargaining agreement.
RATINGS RATIONALE
YRCW's CFR of Caa3 reflects the company's pre-refinancing credit profile, which is marked by weak credit metrics and near-term liquidity pressure from an aggregate amount of debt maturing in 2014 and 2015 of approximately $400 million and $670 million, respectively. YRCW intends to refinance its capital structure primarily through (i) a new $700 million first lien term loan, (ii) a new $450 million first lien ABL credit facility, and (iii) the equivalent of approximately $300 million of new equity. Simultaneously, YRCW is in the process of amending and extending its collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"). Following an unsuccessful union vote on its original proposal earlier this month, YRCW announced yesterday that union members voted in favor of a revised proposal.
The refinancing includes the exchange or conversion of approximately $50 million principal amount of the company's Series B Convertible Notes into equity. Moody's is likely to recognize a limited default as a result of this transaction, as it considers the delivery of stock to note holders a diminished financial obligation relative to the original obligation, and the exchange has the effect of allowing the issuer to avoid a payment default.
In recognition of the material improvements to YRCW's capital structure that will follow a successful closing of its intended refinancing, as well as the potential savings resulting from the new IBT agreement, Moody's expects to upgrade the CFR and PDR for YRCW to B3 and B3-PD when the transaction closes. Moody's also expects to upgrade the company's speculative grade liquidity rating ('SGL') at that same time.
The expected CFR upon completion of the transaction will continue to take into account YRCW's elevated debt levels, despite an anticipated debt reduction of approximately $250 million. In calculating YRCW's debt levels, Moody's takes into account its standard adjustments for operating leases and pension liabilities. Moody's estimates that the debt adjustment associated with YRCW's pension liabilities will represent almost half of YRCW's total debt. The expected CFR also takes into consideration YRCW's improved ability to generate cash flows following the refinancing, as the company benefits from materially reduced interest expenses and cost savings from the implementation of the new IBT agreement. Importantly, this would allow the company to increase its capital expenditures, which have been constrained in recent years due to its weak financial condition. The expected improvements in YRCW's liquidity profile derived from extending all material debt maturities and achieving positive free cash flow, further support the expected rating post-refinancing.
The assignment of the (P)Ba3 rating to the new $700 million first lien term loan is derived from the anticipated improvement in the CFR post-refinancing. If the transaction is closed as anticipated, the CFR will be raised to B3 and the Ba3 rating on the term loan will be affirmed with the (P) designation removed. The rating differential between the (P)Ba3 instrument rating and the expected CFR for YRCW is caused by the relatively high proportion of unsecured debt in YRCW's total debt structure, which tends to affect positively the instrument ratings for secured debt in Moody's Loss Given Default analysis.
RATINGS RATIONALE
YRCW's CFR of Caa3 reflects the company's pre-refinancing credit profile, which is marked by weak credit metrics and near-term liquidity pressure from an aggregate amount of debt maturing in 2014 and 2015 of approximately $400 million and $670 million, respectively. YRCW intends to refinance its capital structure primarily through (i) a new $700 million first lien term loan, (ii) a new $450 million first lien ABL credit facility, and (iii) the equivalent of approximately $300 million of new equity. Simultaneously, YRCW is in the process of amending and extending its collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"). Following an unsuccessful union vote on its original proposal earlier this month, YRCW announced yesterday that union members voted in favor of a revised proposal.
The refinancing includes the exchange or conversion of approximately $50 million principal amount of the company's Series B Convertible Notes into equity. Moody's is likely to recognize a limited default as a result of this transaction, as it considers the delivery of stock to note holders a diminished financial obligation relative to the original obligation, and the exchange has the effect of allowing the issuer to avoid a payment default.
In recognition of the material improvements to YRCW's capital structure that will follow a successful closing of its intended refinancing, as well as the potential savings resulting from the new IBT agreement, Moody's expects to upgrade the CFR and PDR for YRCW to B3 and B3-PD when the transaction closes. Moody's also expects to upgrade the company's speculative grade liquidity rating ('SGL') at that same time.
The expected CFR upon completion of the transaction will continue to take into account YRCW's elevated debt levels, despite an anticipated debt reduction of approximately $250 million. In calculating YRCW's debt levels, Moody's takes into account its standard adjustments for operating leases and pension liabilities. Moody's estimates that the debt adjustment associated with YRCW's pension liabilities will represent almost half of YRCW's total debt. The expected CFR also takes into consideration YRCW's improved ability to generate cash flows following the refinancing, as the company benefits from materially reduced interest expenses and cost savings from the implementation of the new IBT agreement. Importantly, this would allow the company to increase its capital expenditures, which have been constrained in recent years due to its weak financial condition. The expected improvements in YRCW's liquidity profile derived from extending all material debt maturities and achieving positive free cash flow, further support the expected rating post-refinancing.
The assignment of the (P)Ba3 rating to the new $700 million first lien term loan is derived from the anticipated improvement in the CFR post-refinancing. If the transaction is closed as anticipated, the CFR will be raised to B3 and the Ba3 rating on the term loan will be affirmed with the (P) designation removed. The rating differential between the (P)Ba3 instrument rating and the expected CFR for YRCW is caused by the relatively high proportion of unsecured debt in YRCW's total debt structure, which tends to affect positively the instrument ratings for secured debt in Moody's Loss Given Default analysis.
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