Sunday, May 01, 2011

YRCW Restructuring Successfully Dilutes Shareholders Into Irrelevancy

The latest news from YRCW is confirmation of the company's ability to eke out an existence that defies reality.  Its creditors have agreed to a restructuring.  The plan is to cancel the company's massive debts by issuing massive amounts of new equity shares to debt holders.  This will leave existing shareholders with no more than 2.5% of the company.  Let's do some quick math on that revaluation.  YRCW closed Friday at $1.98/share.  Reducing that to 2.5% means a single share after dilution will have a market value of $0.0495.  The stock isn't even worth a nickel.  It will be worth even less if management exercises further dilutive rights after the new equity is issued. 

This instant devaluation will immediately subject the firm to another delisting review by NASDAQ.  That delisting will make it very difficult for the company to raise the $100mm in new capital it needs to survive. 

The earnings call on May 6 will reveal just how long the proposed new financing will carry the company. The company's total cash flow in 2010 was about $61.5mm, so $100mm in new financing would theoretically last more than a year at their present burn rate.  If net income turns negative again, the new asset-backed loan covenants may require the surrender of assets.  What are the triggers?  Creditors are not fools and will not provide money for free.  Let's see the agreement's details, please. 

YRCW's Pyrrhic victory in restructuring ultimately leaves nothing of value for individual shareholders.  This can't go on forever. 
Full disclosure:  No position in YRCW.