WASHINGTON -- The Treasury Department announced Wednesday that it will lend $700 million to a trucking firm that ships military equipment, in exchange for having U.S. taxpayers acquire an almost 30% stake in the company.
Under the unusual arrangement, the Treasury Department will provide the emergency loan to YRC Worldwide, while taking a 29.6% equity stake in the company. The U.S. government does not typically take ownership stakes in companies but was given permission to do so by Congress as a way to ensure taxpayer funds are not misspent.
The deal is the first under a $17 billion loan program approved as part of the broader stimulus by Congress in March. That pot of money was earmarked for firms deemed "critical" to U.S. national security. Congress gave the Treasury Department the authority to approve more than $500 billion in emergency loans to companies and cities, although most of that money has not been disbursed.
"We are pleased for Treasury to make this loan pursuant to the CARES Act," Secretary Steven Mnuchin said in a statement. "This loan will enable a critical vendor to the Department of Defense to maintain significant employment while providing appropriate compensation to taxpayers."
YRC Worldwide is a publicly traded company with headquarters in Kansas. With a fleet of about 7,600 tractors and 30,000 trailers, YRC is one of the largest "less-than-truckload" transportation companies in North America. It covers 68% of the military's services in that category, according to the Treasury Department's announcement.
CRITICS ON TWO SIDES
The investment could intensify questions over the Treasury Department's handling of hundreds of billions in taxpayer aid at a pivotal moment for the U.S. economy. Some critics have said the department's interventions amount to a large corporate bailout for undeserving firms, while others have argued the money should be more swiftly distributed with fewer conditions to avert rising unemployment. The Treasury Department did not spend any of the $17 billion for more than three months, raising questions about the program's effectiveness as companies sought other means of funding.
The relief measure requires that companies receiving help through the $17 billion fund give the government an equity stake or a warrant, a financial instrument that allows the lender to claim stock at a later date.
Most defense contractors considered those terms too onerous, defense executives and lobbyists told The Washington Post.
"There are too many bells and whistles going in the wrong direction, and major aerospace companies just aren't interested" in the $17 billion fund, said Arnold Punaro, a retired Marine Corps general who works as a defense consultant. "If this were a good deal for our aerospace companies, they would be using it."
OPTIONS ELSEWHERE
Although many companies were financially desperate as the crisis deepened in late March and early April, many of them found other options. Numerous defense contractors found relief through other relief programs. A handful of defense suppliers received Paycheck Protection Program loans backed by the Small Business Administration, which have no equity requirement and have the option of being forgiven.
The Defense Department is spending $668 million in Defense Production Act funding on the defense industrial base. That funding is being meted out through existing, open contracts that don't have to be renegotiated and don't require any equity stake.
With capital markets improving throughout April and May, some companies found other options through private markets.
"When the CARES Act passed, most defense companies looked at the program as an option, but most determined that the conditions associated with the loan program were so restrictive it made obtaining capital through other means a better option," said Jeff Green, a lobbyist who works with several defense firms that considered applying.
A Treasury Department statement said the loan will allow YRC to keep about 30,000 trucking jobs and "continue to support essential military supply chain operations" used by more than 200,000 companies in North America.
The department also cited a certification from the defense secretary about YRC's critical value for national security. The agreement includes limits on executive compensation and dividend payments to shareholders, but the department has not disclosed what those are.
While it is unusual for the United States to acquire parts of companies, such arrangements are common internationally and help governments ensure that taxpayers receive a return for their investment. If the price of YRC's stock goes up, taxpayers will also benefit as a traditional investor would. "During this crisis, the government should not let companies fail, but it also should not bail out the wealth of their owners. Providing loans for equity accomplishes exactly this," said Matt Bruenig, founder of the left-leaning People's Policy Project.