In early October, YRC Worldwide drew $325 million from a $725 million credit line to pay off senior debts due in December and May 2009. “Given the unrest in the credit markets, we believe it is in the best interests of YRC to satisfy these maturities early,” William Zollars, chairman, president and CEO, said in a statement.
Other truck carriers are not as fortunate as YRC to have a ready line of credit. For example, despite its high creditworthiness, nine-year-old Gavito Trucking in Milliken, CO, which is down from four trucks to three because of low freight levels and high fuel costs, received a letter from Wright Express stating that their line of fuel credit would be cut from $60,000 to $49,000 a month. Owner Laura Gavito says that the company will keep going as best as it can in these times of tight credit.
We don't yet know the extent of the frozen credit markets on the trucking industry. What we do know, however, is that the government's plan to inject $700 billion of liquidity into the banking system will help. But, what may help even more was a follow-up announcement that the Federal Reserve was creating the Commercial Paper Trading Facility to buy unsecured and asset-backed commercial paper directly from eligible insurers. Among the assets to be covered are credit cards and vehicle loans.
The $1.7 trillion commercial paper market is critical to the trucking industry because it is used to fund day-to-day operations such as fuel purchases, vehicle loans and payrolls.
“Commercial paper seems to have become the choke point in the credit pipeline,” says Bob Dieli, president of RDLB Inc., an economic research and management consulting firm based in Lombard, IL. “The Fed is telling banks to buy commercial paper and they will backstop it… I think this will be more important to truck carriers than the $700 billion bank rescue plan.”
The commercial paper market is especially crucial for truck carriers because their accounts receivables are high but so are their day-to-day expenses such as fuel, vehicle payments and payroll. However, anecdotal reports suggest incoming payments have fallen from 30 days to 45 or 60 days recently, and this puts an enormous strain on a carrier's ability to meet its own payments.
This inability to meet payments, in part, has caused almost 2,000 trucking companies to fail during the first six months of 2008, according to industry analysts.
One way that carriers have tried to cope with cash shortages is through factors. Some truckers report that they used to turn over 25% of their receivables to factors, and that number has doubled in some cases to 50% of receivables.
On the equipment side, dealers report that finding funding for new and used purchases has been tough lately. Jeff Mundy of 100-year-old Hill, with offices in East Liverpool (OH), Wheeling (WV), and Washington (PA), says that one loan source to which he often directs buyers was bought by GE and they decided to stop lending for a week. “They said, ‘We're not booking anything new and we're not honoring any current approvals.’ Then they changed their mind and said they would honor those in the pipeline but for 10 days instead of 30 and with rates increasing from 2 to 3% higher.” Mundy says that helped pick up the slack. “We have long-time relationships [with loan sources] and probably have done better than others,” he says.
The end goal is to get credit flowing again, says Dieli, but that not only depends upon federal intervention but a willingness on the part of banks to lend money. “They [the federal government] want the reports that people can't borrow money to stop.”