Canadian trucking conglomerate Pride Group Holdings Inc. has two months to craft a restructuring plan after filing for creditor protection with $1.6-billion in debt, a challenging exercise for its court-appointed monitor because the entire sector is reeling from oversupply.
Pride, based in Mississauga, filed for creditor protection in late March after defaulting on more than 40 loans. An Ontario judge has appointed Ernst & Young as the monitor to oversee the restructuring. In its first report, filed Thursday, E&Y said it was moving quickly to sell all of Pride’s real estate assets.
Pride’s co-founders, brothers Sam and Jasvir Johal, are also working with E&Y and an independent restructuring specialist to prevent liquidation. However, doing so won’t be easy because the company typically leases trucks to independent operators, and this segment of the sector has been one of the hardest hit by the continuing slump in freight shipments.
“There’s such an oversupply of those independent owner-operators,” said Chris Henry, a consultant at KSM Transport Advisors.
In a strong market, Pride’s trucks could be sold or re-leased to a competitor, but that isn’t very feasible for any operator in the current environment. “At this present moment, no legitimate, sustainable carrier is going to pick up additional tractors,” Mr. Henry said.
The transportation sector is currently struggling with what is known as a freight recession. Even though the broad economy in Canada and the United States has kept growing, freight shipments have plummeted from their peak levels during the pandemic.
Compounding the pressure, there are too many available trucks. At the height of the pandemic, scores of independent truck drivers joined the market because they could quickly get their licences, lease vehicles at a low interest rate, then quickly pick up business in what is known as the spot market. “There are no real barriers to entry in trucking,” Mr. Henry said.
This scenario has unravelled over the past year. Interest rates have jumped, curbing consumer spending and, notably, home building and renovations, which are key sources of trucking industry demand. The cost of financing a truck has also soared.
The oversupply of independent truck drivers means shipping rates have dropped sharply – and those rates may not be enough to cover lease payments.
In its request for creditor protection, Pride pleaded for time to restructure instead of being forced to liquidate. The company argued that a liquidation would result in “thousands of trucks being sold on the market at once, which would decimate the value of trucks across the North American market.”
Pride currently has a fleet of approximately 20,000 trucks and tractor-trailers across Canada and the U.S. At the end of March, it had approximately 1,350 delinquent lease cases – 600 in Canada and 750 in the United States.
Pride also argued that a liquidation would likely push many truck owners and operators into insolvency because the market value of their most significant asset would plummet. If this played out, it would have an outsized effect on a particular community; in its report, E&Y noted that many of Pride’s customers and drivers are from South Asia.
A number of trucking companies are already hurting and hoping to offload some of their own inventory. Mullen Group is one of Canada’s few publicly traded trucking and logistics firms, and when it last reported quarterly earnings, in February, chief executive officer Murray Mullen warned on a conference call with analysts that it was a rough market for many small and mid-sized companies.
“There is too much capacity. The competition is fierce, and margins are suffering. We hear this every day. We see it in all of our inboxes with acquisition opportunities,” he said. “Many carriers are suffering with low-to-no profits and very high debt levels. This also suggests to me that something must give, and I expect more business failures in 2024.”
If the freight recession drags on, Pride could find itself in a similar situation to that of 19th Capital, a former truck-leasing division of Canada’s Element Fleet Management Corp. Based in Indianapolis, 19th Capital started struggling around 2018, and a new management team at Element tried to cut its losses by selling the division in 2019.
However, the trucking industry experienced a freight recession that year – the industry is notoriously volatile – and Element struggled to find buyers. In early 2020, it told investors the sale process attracted nearly 50 potential buyers and garnered multiple serious expressions of interest, but it still could not secure a sale “on acceptable terms” and took another writedown on the business. In total, Element wrote down 19th Capital’s value by hundreds of millions of dollars.
Selling Pride’s real estate assets may prove to be easier, in part because many are industrial properties that are still in demand, despite higher interest rates. However, Pride may not recoup all that much from them.
The properties are held in multiple holding companies and are valued at $384-million, according to Pride, but they have mortgages totalling $357-million, and the holding companies have intercompany debt of $37-million.
Tim Kiladze