Dilution Coming: Time Running Out for YRC Worldwide Shareholders

Jul.26.11 | About: YRC Worldwide, (YRCW)
In our last article discussing YRC Worldwide (NASDAQ:YRCW), we discussed the implication of the company’s restructuring plan, and the impending dilution resulting from the issuance of billions of additional shares. We reiterate our price target of $0.28 per share, based on the calculations in that article.
This article outlines the progression with the restructuring plan, given the milestones surpassed on July 22. We will outline the number of common shares that will be created as a result of conversion of preferred stock and convertible notes.
1. Details of balance sheet restructuring completed
On 22 July, YRCW announced that it had closed its financial restructuring plan. This involved the following:
  • 3,717,948 preferred shares were issued in exchange for a portion of the company’s loans and other debt.
  • 1,282,051 preferred shares were issued to the IBT Employee Stock Trust.
  • Series A notes ($140 million face value) were issued to a smaller group of the company’s lenders.
  • Series B notes ($100 million face value) were sold to investors, providing $100 million in additional liquidity.
The positives from the above are that $1,033,566,247 of debt was canceled, and that YRCW received $100 million proceeds from the Series B notes.
However, there were substantial negatives for YRCW shareholders. These are best summarized by the following quote from the company’s press release of July 22:

“As a result, the company's shareholders at the time of the exchange will be reduced to holding approximately 2.5% of the company's outstanding stock and will be subject to further dilution by a proposed management incentive plan and the conversion of new convertible notes.”

2. Details of actions to be completed

As discussed in the company’s S-1 filing of May 17, following completion of the restructuring, the company will hold a shareholders’ meeting. In this meeting the company will seek approval from shareholders for the Charter Amendment Merger as described in the S-1 filing. This includes the automatic conversion of the preferred stock into common stock. It is highly likely that shareholders will give this approval, given that holders of the newly issued preferred stock will be able to vote on an “as converted” basis – representing about 97.5% of the company. A vote to approve the Charter Amendment Merger will also allow preferred shareholders to sell their (converted) common stock – the preferred stock is not listed on any exchange.

It is also highly likely that holders of the Series A and Series B notes will convert their debt into common stock, given that the conversion prices are extremely low compared to the 22 July closing price of YRCW shares.

Description of convertible debt

Conversion price

Conversion price of Series A notes


Conversion price of Series B notes


Click to enlarge

Once the company receives shareholder approval for the Charter Amendment Merger, the following securities will be converted, or will become convertible:

Description of debt or equity

Size of holding

Number of common shares this converts into

When conversion will take place

Preferred stock issued to debt holders



Automatic conversion upon shareholder approval of the Charter Amendment Merger

Preferred stock issued to the IBT Employee Stock Trust



Automatic conversion as above

Series B notes

$100 million face value


Will become convertible upon shareholder approval as above

Series A notes

$140 million face value


22 July 2013

(two years after issue date)

Click to enlarge

The following table describes the increase in the number of YRCW shares outstanding based on probable future events:

Current shares outstanding


Shares outstanding after conversion of preferred stock into common stock


Shares outstanding after conversion of preferred stock into common stock and after conversion of Series B notes into common stock


22 July 2013, assuming conversion of all preferred stock into common stock, and conversion of all Series A notes and Series B notes into common stock


Click to enlarge

Once shareholder approval is received, over 1.9 billion shares will be available for sale, compared to the current shares outstanding of less than 48 million. A more probable share count will be 3,528,254,426 shares, which includes the conversion of the Series B notes.

Given the $0.28 valuation we calculated, it’s highly likely most of these new shares will be sold shortly after conversion.

Disclosure: I am short YRCW.

Additional disclosure: The above commentary is provided for informational purposes in only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any stock you should conduct your own research and analysis, and seek advice from an independent financial adviser. We have a short position in YRCW and will profit if its share price declines.