Canadian trucking conglomerate Pride Group Holdings Inc. has a two-month window to develop a restructuring plan after applying for creditor protection with a debt of $1.6 billion. This task poses a challenge for its court-appointed monitor due to oversupply issues impacting the entire industry.
Pride, a company based in Mississauga, sought creditor protection in late March due to defaulting on over 40 loans. An Ontario judge has assigned Ernst & Young as the monitor for overseeing the restructuring process. According to the initial report filed on Thursday by E&Y, they are swiftly working to sell all of Pride's real estate assets.
Pride's co-founders, brothers Sam and Jasvir Johal, are collaborating with E&Y and an independent restructuring specialist to avoid liquidation. However, this task is challenging due to the company's usual practice of leasing trucks to independent operators, a segment of the industry significantly impacted by the sustained downturn in freight shipments.
"There is an excess of independent owner-operators," noted Chris Henry, a consultant at KSM Transport Advisors.
In a strong market, the trucks owned by Pride could potentially be sold or leased to a competitor. However, this is not a practical option for any trucking company in the current economic conditions. According to Mr. Henry, in the current situation, no reputable and long-lasting carrier would be willing to add more trucks to their fleet.
The transportation industry is currently facing a freight recession. Despite ongoing economic growth in Canada and the United States, freight shipments have dropped significantly from their peak levels during the pandemic.
Compounding Pressure from an Oversupply of Trucks in the Market
Amid the pandemic peak, many independent truck drivers entered the industry rapidly by obtaining licenses easily and leasing vehicles at low rates. This surge in new entrants led to a saturated market, with limited barriers to entry, as highlighted by Mr. Henry.
This situation has developed over the past year. The rise in interest rates has led to a decrease in consumer spending, particularly in home construction and renovations, which are important sectors for the trucking industry. Additionally, the cost of financing a truck has significantly increased.
The abundance of independent truck drivers has led to a significant decrease in shipping rates, which might not be sufficient to cover lease payments.
In its plea for creditor protection, Pride requested time for a restructuring process instead of being pushed to liquidate. They argued that a sudden liquidation would flood the market with thousands of trucks, significantly decreasing the value of trucks in North America.
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Pride has a fleet of around 20,000 trucks and tractor-trailers in Canada and the United States. By the end of March, they had approximately 1,350 lease cases in arrears – 600 in Canada and 750 in the United States.
Pride asserted that if liquidation occurred, many truck owners and operators could face insolvency as the market value of their main asset would drop. This would particularly impact a specific community; E&Y's report highlighted that a significant number of Pride's customers and drivers are from South Asia.
<p>Several trucking companies are currently experiencing difficulties and looking to reduce their inventory. Mullen Group, a publicly traded Canadian trucking and logistics company, highlighted the challenging market conditions for small and mid-sized companies in its last quarterly earnings report shared in February by CEO Murray Mullen during a conference call with analysts.</p>
"There's an oversupply issue, intense competition, and declining profits. This is a common theme in the industry, evident from the numerous acquisition offers flooding our inboxes," he mentioned. "Many transport companies are struggling to generate profits, carrying significant debts. This precarious situation indicates that changes are inevitable, and I anticipate more bankruptcies in 2024."
If the freight downturn continues, Pride might face a situation similar to what happened with 19th Capital, a truck-leasing division formerly owned by Element Fleet Management Corp in Canada. Situated in Indianapolis, 19th Capital began experiencing difficulties around 2018, prompting Element's new management team to try minimizing their losses by selling the division in 2019.
The trucking industry faced a period of decreased freight movement that year, as the sector is known for its fluctuations. Element had difficulty finding buyers for its business during this time. Despite attracting nearly 50 interested parties and receiving serious offers, the company was unable to finalize a sale at terms it found acceptable. Consequently, Element had to devalue 19th Capital by hundreds of millions of dollars.
Selling Pride's real estate assets may be easier since many are industrial properties still in demand, despite higher interest rates. However, Pride may not make significant gains from selling them.**
The holdings are spread across several holding companies and have a value of $384 million according to Pride. However, these properties also carry mortgages totaling $357 million, with additional intercompany debt of $37 million within the holding companies.
