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Law360 (July 21, 2020, 9:53 PM EDT) -- The Congressional Oversight Commission says it will investigate a $700 million CARES Act loan issued to troubled shipping company YRC Worldwide Inc., questioning the U.S. Treasury Department's assessment of YRC's value to national security.
In its third report on federal disbursement of COVID-19 relief funds, released Monday, the commission said it plans to scrutinize Treasury's decision to bail out YRC, formerly Yellow Roadway Corp., which the department says provides the majority of small freight shipping for the U.S. Department of Defense. YRC was near bankruptcy at the beginning of 2020 and was deemed eligible for the large windfall under a national security provision in the department's loan policy despite not appearing to qualify.
"YRC apparently did not meet either of the two national security eligibility criteria. However, YRC qualified for the program under a catch-all provision created by the Treasury ... based solely on a recommendation and certification from the secretary of defense or the director of national intelligence," the report said.
The commission argued that YRC does not provide the same kind of "sophisticated services" as other defense contractors such as Boeing and General Electric, the companies U.S. Treasury Secretary Steve Mnuchin previously said the "catch-all" was created to protect.
"It is far from clear that the fourth-largest [less-than-truckload] shipping company in the United States is critical to maintaining national defense," the report said.
The report did not mention an ongoing lawsuit first filed by the Pentagon in 2018 against two YRC subsidiaries. On July 17, a New York federal judge allowed the DOD to move forward with its claims alleging the transporters systematically overcharged it for thousands of shipments.
The commission, which was established by the Coronavirus Aid, Relief and Economic Security Act, noted that despite YRC's ongoing federal contract, the company had been "at risk of bankruptcy before it obtained a loan from the Treasury." The panel said it had decided to investigate in part because "the risk of loss of U.S. taxpayer money on this loan appears high."
As part of the terms of the loan, the federal government assumed 29.6% equity in YRC. The loan is due to YRC in two tranches and is set to mature on Sept. 30, 2024, according to the Treasury.
The Treasury did not immediately respond to a request for comment Tuesday.
"This loan will enable a critical vendor to the Department of Defense to maintain significant employment while providing appropriate compensation to taxpayers," Mnuchin said in a statement announcing the loan award on July 1.
Following the loan announcement, YRC's share price jumped from $1.83 to $3.23. The company has come close to bankruptcy at other times in the past 15 years, most recently at the end of 2019, when the company reported net losses despite being approved for a $600 million loan in September. That loan will also come due in 2024, according to YRC's most recent 10-Q filing. The company also reported two proposed shareholder class actions last year, which were ultimately dismissed.
Moody's downgraded YRC's investment rating to CAA1 in March. The company was reevaluated at a B1 with a stable outlook on July 8.
"Given the company's long-term non-investment grade rating and previous close calls with bankruptcy over the years, it is not clear that an equity stake in YRC will provide much, if any, compensation or protection to taxpayers," the commission said.
YRC did not respond to a request for comment Tuesday.
In a statement following the loan announcement, YRC Worldwide CEO Darren Hawkins said, "Our 30,000 employees have continued to serve hundreds of quarantined communities across the country during the pandemic and this financial assistance will enable us to bridge this pandemic-related crisis and continue to provide essential shipping services for the nation's supply chain."
In April, President Donald Trump appointed Hawkins to his Great American Economic Revival transport industry group.
--Additional reporting by Daniel Wilson. Editing by Brian Baresch.
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