Dilution or Bankruptcy: The Future Looks Dim for YRC Worldwide Shareholders

Jul.19.11 | About: YRC Worldwide, (YRCW)

On 17 May 2011, YRC Worldwide (NASDAQ:YRCW) filed an S-1 with the SEC that describes its intention to issue billions of shares in exchange for a relatively small amount of its outstanding debt.

The exchange offer expired on 15 July at 5pm, and shareholders should expect an announcement from the company shortly regarding the success (or otherwise) of the restructuring plan. Regardless of the outcome, the future looks bleak for YRCW shareholders.

If the plan succeeds, the company will issue billions of additional shares.

Alternatively, “If we do not complete the financial restructuring, it is very unlikely we will be able to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness and other obligations when due and we would likely need to seek protection under the U.S. Bankruptcy Code.”

As a result of our analysis of the restructuring plan, we have a price target of $0.28, which is over 78% lower than the closing price of $1.31 on 15 July.

1. Debt Exchange and stock issue to IBT Employee Stock Trust

1a. Debt exchange:

The company will exchange $1,033,566,247.30 in credit agreement claims for shares of new preferred stock that are convertible into common stock. The new preferred stock will be convertible into 1,384,832,389 shares of common stock.

1b. Stock issue to IBT Employee Stock Trust

If the exchange offer is completed, new preferred stock (also convertible into common stock) will be issued to the IBT Employee Stock Trust. The new preferred stock will be convertible into 477,528,410 shares of common stock.

2. New debt: Series A Notes and Series B Notes

In addition to the receipt of the new preferred stock, some holders of credit claims will receive $140 million principal amount of Series A notes. These notes are convertible into common stock at a price of $0.1134. Therefore the $140 million represents an additional 140 million / 0.1134 = 1,234,567,901 shares of common stock.

Credit claims holders are also given rights to purchase $100 million in Series B notes. These notes are convertible into common stock at a price of $0.0618. Therefore the $100 million represents an additional 100 million / 0.0618 = 1,618,122,977 shares of common stock.

3. Calculation of valuation

On 28 February, YRCW gave the first hints regarding the significant dilution that would be the result of its restructuring plan.

The market capitalisation of the company’s stock on 25 February was:

47,770,650 shares outstanding * $3.42 = $163,375,623.

Value of restructured company:

Existing company value


Debt cancellation


Series B notes proceeds


Total value


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Note that the debt cancellation represents about 79% of the company’s value.

Number of shares outstanding:

Existing shares outstanding


Shares to be issued to credit claims holders


Shares to be issued to IBT Employee Stock Trust


Conversion of Series A notes


Conversion of Series B notes


Total shares outstanding after restructuring:


Click to enlarge

1,296,941,870 / shares outstanding 4,762,822,327 = $0.2723 price target

4. “Earnings” guidance provided

On 14 July, YRCW provided earnings guidance showing projected EBITDA of $210 million for 2011. Some media outlets reported this information as good news, especially in light of the company’s EBITDA of $74 million in 2010. We caution investors that the $210 million does not include expenses that the company will incur.

The complete picture, as described in the 8-K filing, includes the following:

Depreciation and amortization


Letter of credit expense and non-cash stock compensation


Restructuring fees


Operating income


Click to enlarge

Furthermore a recent Bloomberg article stated that the company is borrowing $225 million for 3 years at 11.25%.

Negative operating income and borrowing at an interest rate of 11.25% are hardly indications of a strong company.

5. Valuation guidance from S-1 filing and options market

The above valuation of $0.28 per share compares very favourably with other “valuation guidance” provided in the S-1 filing.

This guidance includes:

Conversion price of Series A notes


Conversion price of Series B notes


Conversion price of preferred stock

($44.38 liquidation preference per share, 372.4722 common shares per 1 preferred share)


Click to enlarge

Furthermore, the share count of 4,762,822,327 that we used above is quite generous when compared to the share count used by YRCW in the S-1 filing. The company used a share count of 5,978,390,211 shares to be issued, representing additional shares issued to holders of Series A and Series B notes as payment-in-kind for interest owing to noteholders, and “make whole premium” for Series B noteholders.

The options market also provides a great indication of market expectations of the value of YRCW stock following the completion of the restructuring. As at the close of trading on 15 July, the August $0.50 and $1.00 calls were trading with time value of close to zero. Whereas the August $1.00 puts were bid at $0.31, despite being $0.31 out of the money. Likewise, the August $1.50 puts (trading at $0.19 in the money) were bid at $0.72 – a time value of $0.53.

This skew suggests that most investors expect a significant decline in YRCW shares as a result of the impending dilution. We agree with the options market, and have a price target of $0.28 per share.

Disclosure: I am short YRCW.