“National Security” designation for YRC’s $ 700 million loan “missing”
The latest report from the Congressional Oversight Committee monitoring COVID relief loans, including the $ 700 million loan made to part-load transporter YRC Worldwide (NASDAQ: YRCW), notes shortcomings in the decision-making process on the part of the Defense and Treasury departments.
The main sticking points for the committee were the designation of YRC as a company “critical to the maintenance of national security” and the taking out by the Treasury Department of a loan to provide liquidity to a company in the country. a “precarious financial state” before the pandemic.
A December 10 hearing with committee members and Treasury Secretary Steven Mnuchin addressed many of the group’s concerns regarding YRC loan subscription. Under Secretary of Defense for Acquisition and Sustainment, Ellen Lord, declined a request to attend this session, but participated with committee members in a teleconference on December 18.
The year-end monitoring report examines the Defense Ministry’s decision to qualify YRC as a company worthy of the national security designation.
Inappropriate exclusion?
Subtitle A of the CARES (Coronavirus Aid, Relief and Economic Security) law authorizes up to $ 17 billion in loans to companies integral to the country’s defense for “losses suffered as a result of the coronavirus”. The law, however, did not provide a description of what qualifies a company for the national security designation.
Mnuchin argues that the Treasury consulted with the Defense Ministry and the Office of the Director of National Intelligence to develop the framework for which companies would respond to the designation. However, the report shows that the Defense Ministry and the Office of the Director of National Intelligence have a different view of how events unfolded.
“The ODNI informed the commission that it had not provided the Treasury with any recommendation or certification to designate a company as essential to the maintenance of national security and had not provided any input concerning the recommendations and certifications of the DOD”, indicates The report.
The Defense Ministry said it was “not involved in creating the guidelines or definitions used by the Treasury for its application process.” Additionally, Lord referred the commission to the Treasury for “further analysis regarding the national security designation.”
Regardless of how the criteria were set, it was former Secretary of Defense Mark Esper who recommended and certified that YRC, which provides 68% of the Department of Defense’s LTL services for the military, met Standard.
“The commission finds something wrong with the agency that was ultimately responsible for the national security designation. The commission believes that the Treasury should have worked with DOD and ODNI to establish more specific criteria to determine which companies were essential to maintaining national security and / or that the Treasury should have demanded from DOD and ODNI that it provides the Treasury with more analysis than a simple statement that a business is essential to maintaining national security.
Defects in the DOD procurement process
The commission’s requests revealed that the Defense Ministry relies on its main contractors to oversee subcontractors, leaving the ministry with limited visibility. The commission called the process “inadequate”. YRC is a subcontractor of Crowley Logistics, which is a prime contractor for the Ministry of Defense. The commission expressed concern that the ministry did not ask Crowley about the financial health of YRC.
Part of the eligibility process for national security designation included questions such as whether there are “alternative sources for the item supplied by a company” and whether the product or service is “an available product or item”. in trade ”. The commission said the Defense Ministry provided “a very weak case for YRC” because “there are many other companies that provide LTL services outside of YRC and services, such as LTL trucking, could be considered as a commodity “.
The Defense Ministry had previously responded that it had not spoken to other LTL carriers for potential replacement service in the event of YRC failure, another shortcoming in the commission’s opinion.
“The commission believes that the DOD should have used a more robust criteria and process to recommend and certify that a company is essential to maintaining national security. In addition, the commission believes that the DOD is applying their national security designation inconsistently and encourages them to reassess their process in the future, ”the report continued.
The commission said the criteria used would have essentially enabled “countless” Defense Ministry contractors and subcontractors to qualify under the standard.
In total, the Defense Ministry recommended and certified that 20 companies met the designation for the National Security Loan Program, but the Treasury only granted loans to six of those companies.
As of December 8, a total of $ 735.9 million in national security loans had been made to 11 companies, some of which qualified through priority defense contracts or top-secret security clearances. The program expired at the end of the year.
Trésor takes heat
From the start, the committee feared that the Treasury’s underwriting criteria “may have put taxpayers in a precarious position”. Many of these issues were addressed during the hearing, but the report added some additional suggestions and comments.
The report again questioned the Treasury’s underwriting standards for the YRC loan, stating that “after careful consideration of the details of the collateral, debt service and cash obligations in the attachments [the commission] doubts the reliability and adequacy of the underlying assumptions for cash flows and the values of property, plant and equipment. The report also noted that a declining income scenario was not performed on any of the companies receiving national security loans and that the liquidity analysis used was not sufficient to determine whether the loans would be repaid.
Mnuchin claimed the Treasury had been encouraged by lawmakers to be aggressive with their underwriting guidelines and take losses in the program to save jobs for companies facing a near-term COVID-induced liquidity crunch.
The report says the $ 300 million A tranche of the loan agreement with YRC covering deferred health, welfare and retirement payments was a “good faith effort” and in line with the intent of the program. to “provide funding in response to losses suffered by COVID-19.”
The report objected to the second tranche of the $ 400 million loan, which is used to replacement of tractors and trailers. “This type of loan goes beyond the financing of the CARES law,” the report said. “The Treasury should better understand the underlying collateral when taking out a loan and better measure the losses incurred caused by COVID.”
During the hearing, Mnuchin recommended that the Treasury sell the YRC loan and liquidate the stock position at a profit. He said the Treasury did not want to deal with “loans to this type of company or to any of the national security companies,” a suggestion the committee agreed with in the report.
A member continuing White House ties to the leave committee
Bharat Ramamurti, a lawyer appointed to the commission, resigned from this role to join the Biden administration as deputy director of the National Economic Council. Ramamurti was part of one of the few contentious moments during the hearing, pressuring Mnuchin about the potential influence of Senior White House adviser Jared Kushner on the YRC loan and his “close ties” to Apollo Global Management (NYSE: APO). Apollo provided YRC with a $ 600 million loan in September.
At the time, Ramamurti said he wanted to hold a separate hearing on the matter.
Mnuchin said no one from Kushner’s staff had contacted him and the loan was not a private equity bailout. He said he would turn over any correspondence the Treasury had with the White House to the commission. The report makes no reference to the issue.