By washingtonpost |
In unusual deal, U.S. Treasury to acquire 30 percent of trucking company in exchange for $700 million loan
American flags are reflected in a protective shield as Treasury Secretary Steven Mnuchin testifies during a House Financial Services Committee hearing on the coronavirus response on Capitol Hill in Washington, Tuesday, June 30, 2020. (Tasos Katopodis/Pool via AP)
By Jeff Stein and
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Reporter covering the defense industry and government contractors
Email Bio FollowJuly 1 at 11:07 AM
The Treasury Department announced on Wednesday that it will loan $700 million to a trucking firm that ships military equipment, in exchange for having U.S. taxpayers acquire an almost 30 percent stake in the company.
Under the unusual arrangement, the Treasury Department will provide the emergency loan to YRC Worldwide Inc., while taking a 29.6 percent 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 America’s national security. Congress gave Treasury 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 T. 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 is a publicly traded company headquartered in Kansas.
The investment could intensify questions over Treasury’s handling of hundreds of billions in taxpayer aid at a pivotal moment for the U.S. economy. Some critics have said Treasury’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. Treasury 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.
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Mnuchin and people involved in the drafting of the Cares Act have said the $17 billion pot of money was initially intended in large part to help shore up Boeing, the battered U.S. aerospace manufacturer and defense contractor. Boeing was able to raise sufficient funds to stay afloat through the private credit markets, which were aided by the Federal Reserve’s extraordinary measures, although it has also laid off thousands of workers.
A statement from Treasury 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 Treasury Department also cited a certification from the Secretary of Defense about YRC’s critical value for national security. The agreement includes limits on executive compensation and dividend payments to shareholders, but Treasury has not disclosed what those are.
While it is unusual for the U.S. 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.
The agreement will likely lead to criticisms that U.S. taxpayers are providing special assistance to firms who should not receive help. Darrick Hamilton, a professor at Ohio State University, noted the emergency help comes as protesters in major U.S. cities are calling for cuts to spending on the police and the armed forces. The U.S. government already provides more than $700 billion annually on the federal military.
“The government is supposed to be dealing with social welfare, but is spending money on militarization and policing,” Hamilton said. “This is indicative of our general values of where we spend our money."