Court Rules Against Windstream in Bond Fight With Hedge Fund, Stoking Bankruptcy Talk
Windstream suffered a court setback in a bond fight with a hedge fund that caused the telco's stock to plunge 61 percent Tuesday to $1.31 per share, cutting its market capitalization to $56 million and increasing bankruptcy speculation. Holding company Windstream Services breached Aurelius Capital Master's bondholder contract (indenture) by "engaging in an impermissible Sale and Leaseback Transaction," ruled Judge Jesse Furman, of the U.S. District Court for the Southern District of New York, Friday in U.S. Bank National Association v. Windstream v. Aurelius, No. 17-cv-7857. He ruled Aurelius was entitled to the relief it seeks, including a monetary judgment of $310.5 million, plus interest since July 23.
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Windstream is "frankly surprised” by the ruling and "will be taking immediate steps to pursue all available options, including post-trial motions and an appeal,” said CEO Tony Thomas Friday. “We will work with our creditors on the next course of action." Windstream Monday postponed its planned Thursday release of Q4 earnings due to the ruling.
Aurelius holds a controlling position in senior unsecured notes due in 2023 issued by Windstream Services, and directed the U.S. Bank National Association to sue as indenture trustee, alleging Windstream breached a covenant that restricted sale and leaseback transactions, Furman wrote. Windstream in 2015 spun off certain telecom network assets into a real estate investment trust, Uniti Group. A "default, if uncured, would then trigger an acceleration provision in the indenture that would make the Notes’ entire aggregate principal amount, plus any unpaid interest, due immediately," Furman wrote. After a bench trial in July, he found Friday, by a preponderance of the evidence, that Windstream violated the indenture, and its "subsequent maneuvers did not waive or cure the default arising from that breach."
"Windstream engaged in very complex and exotic financial engineering, exemplified by the creation of Uniti, to buy themselves more time as a going concern but the market always ultimately wins," emailed Chris Antlitz, Technology Business Research analyst. "A bankruptcy filing is not only likely but could occur sooner rather than later."
Raymond James analyst Frank Louthan downgraded Windstream's stock rating from "outperform" to "market perform." He said after an initial pullback, "the possibilities extend from bankruptcy ... absent a successful appeal, or stay which would likely push shares back in the other direction sharply."
Uniti's stock dropped 37 percent to close Tuesday at $12.51 per share. "The validity of our master lease agreement with Windstream was not impacted by the ruling, and access to our network remains critical to Windstream’s operations and its ability to serve its customers," said Uniti CEO Kenny Gunderman.
Aurelius was gratified by the ruling. "That decision found (among other things) that Windstream's legacy 6-3/8% notes due 2023 have been accelerated and that the new 6-3/8% notes due 2023 purportedly issued in November 2017 do not constitute "Additional Notes" under the indenture governing the legacy notes," said the hedge fund Tuesday, adding Windstream's "professed 'surprise' at Judge Furman's well reasoned decision, issued after a multi-day trial and several volumes of exhibits and briefing, has only the modest virtue of consistency to commend it."