In December, I said from a “full-cycle perspective, the five-year average free cash flow for YRC Worldwide (YRCW) is $152 million, and the current yield based on that figure is 6.6% - twice the Treasury yield.
Twice the Treasury yield would normally justify the investment, particularly for investors who are either more optimistic or more risk-tolerant than I am. But given that Landstar (LSTR - Annual Report) is yielding even more and has less risk (in my opinion) over the full cycle it isn’t enough to make me switch.”
Since that time, YRC has declined 25.5%, while Landstar is up 34.6% since I said I expected it to shine again.
As to the question of relative risk, Landstar is virtually debt free, while YRC has loads of debt and recently received a downgrade. As a result, it renegotiated its credit agreement. Until the company’s credit rating is restored to BBB- or better, the Credit Agreement Amendment:
• increases, the Company’s allowable Total Leverage Ratio (as defined in the Credit Facility) from 3.0x to (i) 3.75x for each of the fiscal quarters ended March 31, June 30 and September 30, 2008 and (ii) 3.5x for each fiscal quarter thereafter;
• increases the interest rates and fees applicable to the revolving credit facility; the Company expects interest expense to increase $1.5 – 4.0 million annually with this amendment;
• requires the Company and its domestic subsidiaries to pledge additional collateral;
• requires the Company and its subsidiaries to pledge additional assets, including rolling stock and the remaining real estate if the Total Leverage Ratio exceeds 3.5x at the end of any Test Period (as defined in the Credit Facility) or if the Company receives a rating of BB- or worse from Standard & Poor’s and Ba3 or worse;
• requires each domestic subsidiary of the Company except for YRRFC (as defined below) to guarantee the credit facility; and
• modifies certain negative covenants (and in certain instances introduces new negative covenants) related to permitted liens, permitted acquisitions, permitted asset sales (and certain related mandatory prepayments from the proceeds thereof) and restricted payments.
I fully expect YRC to survive, and at some point it will make for a good trade, as the leverage works in the other direction. In the meantime, I’m glad I am positioned the way I am.
