Designed To Help Small Businesses, Some Penny Stocks Are Benefiting From The CARES Act
The global pandemic that is known as COVID-19 certainly turned the market on its head in 2020. What it also did was point investors’ attention to low priced penny stocks. Of course, we saw this new wave of volatility in the stock market. But it was also the fact that so many higher-priced stocks had dropped so much. As state-wide shutdowns took hold, we saw small business owners scrambling to preserve their life’s work.
In light of this, the U.S. government has been pushing for record stimulus. One of the measures, of course, was the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Things like the Paycheck Protection Program, Emergency Economic Injury Grant, and other SBA relief programs were put in place. These were designed to give businesses a helping hand.
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These resources were made available for “small businesses, as well as certain nonprofits and other employers”. But in some cases, the CARES Act has given public companies access to stimulus funds as well. In many cases, these “loans” ended up eventually becoming an investment in such companies.
A $700 Million Government Bet On Penny Stocks?
Some public companies caused a stir for obtaining a few million in CARES Act loans. This obviously didn’t bode well with the thousands of small businesses that didn’t make the cut. Some either didn’t get funds or didn’t get enough. However, the latest news to hit headlines related to CARES Act loans shows the U.S. Treasury may be investing in penny stocks. But how?
On July 1, Overland Park, Kansas-based company YRC Worldwide Inc. (YRCW Stock Report) made the announcement. The holding company announced that the U.S. Department of the Treasury “intends to provide a $700 million loan to YRCW under authorization provided by Subtitle A of Title IV of the CARES Act.”
Subtitle A of Title IV is referred to as the Coronavirus Stabilization Act of 2020. This section contains 2 sections applicable to eligible businesses: (1) emergency relief and taxpayer protections, and (2) limitation on certain employee compensation, which describes the requirements and restrictions for loans and loan guarantees made under the CARES Act.
The Treasury said the company qualified for the loan under a provision of the $2.2 trillion law Congress enacted in late March. This authorized $17 billion for companies deemed essential to national security.
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YRC Worldwide’s holdings include a portfolio of brands. Names like Holland, New Penn, Reddaway, YRC Freight and HNRY Logistics. Furthermore, according to the company, YRC Worldwide companies have “the largest, most comprehensive network in North America with local, regional, national and international capabilities”. Its companies collectively employ 30,000 trucking professionals, including 24,000 Teamsters.
YRCW Stock Skyrockets 143% Over-Night
One may think that a near 3 quarters of a billion-dollar government facility would be applicable to major logistics companies. However, YRC held a market value of less than $70 million at the market close on June 30th. It was valued at $1.85 per share; yes, a penny stock. After this news of “expected” receipt of CARES Act funds, YRCW stock exploded to highs of $4.50 during premarket trading on July 1. Shares more than doubled overnight.
According to YRC, here are the specifics of the proposed agreement:
YRCW has entered into an agreement on June 30th under which UST will receive 29.6% fully diluted equity ownership in YRCW (pro forma for dilution from the UST equity issuance), described in further detail below, in connection with the loan from UST to YRCW.
This includes an initial tranche of money of roughly $350 million to cover short-term contractual obligations. This includes healthcare and pension payments. The loan terms are LIBOR plus 3.5%, consisting of 1.5% cash and 2.0% payment in kind. This loan matures on September 30, 2024.
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The second tranche of $350 million is planned for use as an investment. YRC said it will use it for trailers and tractors. That’s expected to carry a rate of LIBOR plus 3.5% in cash. That loan also matures at the end of September 2024.
What Comes Next For YRCW Stock?
Obviously, an equity stake from the government in exchange for $700 million has been viewed positively so far. YRC CEO Darren Hawkins explained, “Through our work with over 200,000 customers, including being a leading transportation provider for the Departments of Defense, Energy, Homeland Security, and Customs and Border Protection, YRCW’s freight professionals have developed a deep understanding of, and expertise in, the importance of a secure and reliable supply chain.”
Given this as the case, YRCW stock could have benefited from its current DoD relationships. As for other trucking companies, it will be interesting to see if they are able to qualify for a similar deal. Since this deal would suggest the government has value in a company of this size, it may be worth noting that the deal itself could be an anomaly.
It’s also interesting to see that even before this deal, YRC already carries a significant debt load. A quick look at its most recent 10-Q filed in May shows that Long-term debt and financing, less current portion alone comes in at $838.3 million. On top of that, a look at the YRCW stock chart shows an “interesting trend” For the last 2 years, the stock has been crumbling.
From July 2 2018 to June 30, 2020 YRCW stock fell over 80%. If you take that back to January 24, 2018 high, YRCW stock has dropped nearly 90% as of Tuesday’s closing price. Regardless, we’ll have to see how the government acts as a near 30% investor. What do you think of this latest deal? Will YRCW stock continue to climb or is this another short term jump along its more than 2-year decline?
