On Dec 30, 2009, YRCW was scrambling to figure out how to pay $19 million in interest and fees to creditors which was due the next day. Without that payment, the company was bound to file bankruptcy. At that time the stock was trading right around $1. In a rush to avoid bankruptcy, the company desperately negotiated with the consortium of its senior creditors for a last minute debt-to-equity swap. It worked. This allowed the company to gain access to over $100 million in additional liquidity, which it then used to pay the interest and fees to avoid bankruptcy.
The analyst community has since come out with their opinions. Even though, the company at least temporarily avoided bankruptcy, the major concern remains that the additional liquidity may last only 2 more months. This concern has the stock finding no bounce from here. However, there are few things to consider.
On Jan 6, 2010, Dow Jones Newswires's Bob Sechler sat down with CEO Bill Zollars, who told him that a bankruptcy filing is "not on the radar screen" and that customers "are returning pretty aggressively." Customers "feel a lot better about doing business with us," Zollars told Sechler, and added the “worst is over,” without offering details on customer retention or returns. Regarding liquidity, Zollars reiterated the company has $160 million to get to March, when freight volumes should pick up from seasonal lows, and the company feels confident the company can retire $30 million of bonds by that time.
On Jan 8, 2010, Moody's raised the debt rating up two notches from "Ca" to "Caa2" with an emphasis that the successful debt-to-equity swap has reduced the possibility of default on debt.
On Jan 12, 2010, S&P raised the corporate credit rating from "SD" or "Selective Default" to "CCC-" on successful debt-to-equity swap to avoid bankruptcy.
Bottom line is with the near-term capital structure issues addressed, YRCW needs to turn its attention to its customers, delivering a clear message that the company's financial position is greatly improved and that the risk of bankruptcy is no longer imminent. YRCW has to convince existing customers to stay put, and hopefully convince some former customers to come back.
Additionally, YRCW also needs general economic (and freight) conditions to improve. Pushing more freight through its network is the best/fastest way for YRCW to stem the cash burn, which is critical if the company is going to survive.
This trade is not for the faint of heart. Given CEO's comments above, recent credit rating upgrades and general improvement in the economy, I'd like to give it the benefit of the doubt. As such, I am selling Feb $1 puts for 45 cents. With stock trading at $1 roughly, you might wonder why $1 calls are only 10 cents compared to puts. The reason is YRCW is hard to borrow for short sellers. Those Feb $1 puts provide 45% return on your money in one month if stock stays above $1 by Feb expiration. This to me provides much better odds if you want to play on the long side than outright buying the stock.
