DOD scrutinized over role in bailout fund that has drawn little interest from big companies

By Marjorie Censer, Tony Bertuca  / September 14, 2020

A congressional watchdog is pressing the Pentagon to explain its role in recommending to the Treasury Department companies to receive loans from a $17 billion COVID-19 rescue fund.

The Treasury Department fund, which has gone almost entirely unspent because most contractors disliked the terms, is also the subject of behind-the-scenes debate on Capitol Hill. It has additionally drawn the attention of the Congressional Oversight Commission, established to oversee the $2.2 trillion in COVID-19 stimulus spending.

On Aug. 7, the commission sent Defense Secretary Mark Esper a letter requesting responses to several detailed questions about how the Defense Department certifies companies are critical to national security and therefore qualify for the special Treasury Department loan.

DOD did not respond to questions from Inside Defense. The commission, however, said DOD has pledged to respond to its questions by Sept. 18. The commission initially requested answers by Aug. 27.

The commission's queries stem from Esper's recommendation to the Treasury Department that YRC Worldwide, an Overland Park, KS-based trucking company, receive a $700 million loan.

The loan to YRC, which is the only company thus far to receive aid from the fund, is controversial because of the company's ties to the Trump administration.

The loans are intended for companies affected by COVID-19 that are either performing high-level defense contracts or operating under a top-secret facility security clearance. YRC does not meet either criteria, but the law allows for the loans to be made to companies if the Treasury Department receives a recommendation from DOD.

Esper recommended YRC for the loan on June 26, according to a memo he sent to Treasury Secretary Steve Mnuchin.

Esper also recommended three other companies along with YRC, but their names are redacted in the memo.

On July 8, the Treasury Department announced YRC would receive a $700 million loan in exchange for the federal government getting a 30% stake in the company.

YRC has said it will use the loan to invest in its truck fleet and pay pension and health care costs.

But the COC told Mnuchin in an Aug. 7 letter the "YRC loan appears to expose taxpayers to significant risk."

"YRC's credit has been rated non-investment grade for over a decade," the COC states. "On April 6, 2020, a research report by investment bank Stephens Inc. indicated that YRC might be at risk of a 'potential bankruptcy.'"

The Treasury Department did not respond to requests for comment.

The commission, in its Aug. 7 letter to Esper, asked why YRC, a company that "'provides 68% of less-than-truckload services to the Department of Defense' and reportedly delivers 'food, electronics and other supplies to military locations around the country,'" is considered critical to national security.

The term "less-than-truckload" shipping applies to companies moving relatively small freight.

"Why does the Defense Department believe these services from the fourth-largest less-than-truckload U.S. shipping provider are critical to maintaining national security?" the COC wrote. "What criteria does the Defense Department use in evaluating whether a business is critical to maintaining national security?"

The commission, which noted YRC "has struggled financially for years prior to the COVID-19 crisis," also asked: "What plans did the Department of Defense have in place, before and after the onset of the COVID-19 crisis, should YRC reduce or cease its operations?"

During an Aug. 3 call with analysts, YRC Chief Financial Officer Jamie Pierson called the loan a "once-in-a-lifetime opportunity."

"It has been a long time since this company has had this much runway in front of us, and we intend to capitalize on every single day," said CEO Darren Hawkins.

Meanwhile, the $17 billion Treasury Department fund, which was initially thought to have been established to assist Boeing and General Electric, is not being tapped by large defense contractors, partly because the terms require that the government get equity stakes in participating companies.

Earlier this year, the Pentagon told reporters that only about 20 companies had applied for the loans by a May 1 deadline.

Jerry McGinn, a former top industrial policy official at the Pentagon who now leads George Mason University's Center for Government Contracting, said the terms of the loan were problematic.

"If you build it and nobody comes, there is likely something wrong with what was built," he said. "I can see why defense companies would be reticent to do these types of loans."

McGinn said defense contractors may prefer Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act, which provides reimbursement for contractors whose employees are unable to work because of the pandemic but are kept in a ready state.

Sheila Armstrong, a partner at law firm Morgan Lewis, told Inside Defense she initially had a lot of interest from defense contracting clients in the $17 billion fund.

"Once we provided a terms sheet, almost all of them said this was not a program for them," she said.

Armstrong said the requirements were far more onerous than what companies could find in the commercial market. Some companies "did go to the commercial market and found financing there," she added.

Ellen Lord, the Pentagon's acquisition chief, said during an April 30 press conference she was working with Treasury Department officials to expand the loan program.

"We are in an ongoing dialogue with them," she said at the time. "We are talking to them about those companies. They have also said that DOD could indicate companies that we think would be appropriate for that $17 billion."

Lord, a former defense contracting executive, acknowledged the loans come with "some fairly invasive kind of riders."

"I think companies have to think very carefully about whether that makes good business sense for them," she said. "Now, for public companies, it may not be as interesting as for private companies."

DOD has not provided additional information on how the Pentagon might help the Treasury Department "expand" the loan program.

Meanwhile, this week Lord said it is too early to declare the defense sector past the worst of COVID-19's economic impacts, despite the positive financial earnings reports from many large companies.

"I think the system has absorbed it up to this point in time," she said. "Now, when we get to the point where we're having payments and incentive fees and award fees earned, and if we haven't done the deliveries, that's where you're going to see the hit. So, I believe there is a bit of a delayed response."

Lord said DOD will need between $10 billion and $20 billion to address pandemic-related costs incurred by defense contractors between March 15 and September 15.

Several congressional aides, speaking on background, agreed that some form of "reckoning" is due for the $17 billion in unused Treasury Department funds.

The National Defense Industrial Association is advocating using the mostly untapped fund to reimburse contractors for increased costs related to the COVID-19 pandemic.

Wes Hallman, NDIA's senior vice president for strategy and policy, told Inside Defense it may be "more palatable" to Capitol Hill to repurpose existing appropriations, rather than find new money.

He said NDIA expects current estimates of pandemic-related costs to grow.

"All evidence points to that contracting is more expensive for lots of different reasons during this COVID crisis," Hallman said. "I still believe that that's probably too low and also, as you know, the health crisis unfortunately is probably not going to end on the 30th of September."

Section 3610 is slated to expire Sept. 30, and defense contractor advocates have been pushing for an extension.

Hallman said NDIA has seen some interest from Capitol Hill in repurposing the $17 billion fund as suggested.

"We have a couple key offices in both houses that are really interested," he said. "I think this does have legs."