Federal judge vacates trial for Windstream bond fight with Wall Street hedge fund

A federal judge in New York City late Tuesday vacated an earlier court order setting up a scheduled Dec. 5 trial in Manhattan that would have pitted Windstream Holdings, Inc. against a Wall Street hedge fund that is alleging the Little Rock telecom violated bond agreements related to the spin-off of real estate assets in early 2015.

The legal battle, going back to early September, has led to recent stock struggles and credit ratings downgrades for Windstream and Little Rock-based Uniti Group Inc. nearly 2-1/2 years after the Fortune 500 telecom split off the former Communications Sales & Leasing (CS&L) into a publicly-held real estate investment trust (REIT).

Following a pretrial conference call late Tuesday evening, U.S. District Judge Jesse Furman for the Southern District of New York ordered Windstream to now file a motion by Nov. 21 to dismiss a lawsuit by Aurelius Capital Management “on mootness grounds,” dismissing an upcoming trial scheduled for Dec. 5 because the original complaint is no longer arguable. In Tuesday’s brief order, Furman stated that any opposition to his order must be filed by Dec. 8, and any replies filed a week later.

“Upon the filing of a new complaint by Aurelius …, counsel shall confer and, within one week, submit a joint letter addressing how the litigation should proceed, including but not limited to whether there is a need to adjudicate the question of mootness in the current action; whether and when the Court should hold a conference; and a schedule going forward,” Furman said.

The pretrial conference was held just over three weeks after Windstream first launched a debt exchange offer and consent solicitations on Oct. 18 in respect to senior notes issued by its operating subsidiary, Windstream Services LLC. Since then, Windstream and Aurelius, one of Windstream’s largest bondholders, have been engaged in a legal back-and-forth in which the Wall Street hedge fund sought bond trustee U.S. Bank to halt authentication of the new debt offering.

Windstream announced the debt swaps after U.S. Bank, prompted by an earlier claim in in Delaware Chancery Court in September, filed a lawsuit on Oct. 12 in the New York City-based federal court alleging that Windstream’s issuance of new senior notes would breach an agreement restricting the Little Rock telecom from incurring new debt.

GAMESMANSHIP AND VULTURE CAPITALISTS

In its response to the lawsuit on Oct. 13, Windstream said the U.S. Bank’s claim was “baseless and meritless,” promoted by Aurelius’ “attempt to manufacture an event of default, and to roil the company” into bankruptcy.

“As pure gamesmanship, U.S. Bank (directed by Aurelius) has moved to dismiss the Delaware action based on a purported lack of personal jurisdiction, and now brings this action, which is simply a mirror image of the claims asserted by (Windstream) …,” Windstream states in the 38-page federal court filing verified by CFO Bob Gunderman.

“(Windstream) is not interested in games, but rather in receiving a definitive declaration that there has been and is no continuing default, and there will be no event of default, and brings a swift end to the exploitative efforts to destroy (the company’s) businesses,” the court filing states.

Since Windstream’s response, Aurelius and its billionaire chairman Mark Brodsky have attempted to fight back against accusations that it only acquired its position in Windstream solely to float speculation of an alleged bond default and subsequently bankrupt the Arkansas company. In Wall Street circles, Brodsky is known as a “vulture fund,” or a venture capitalist who invests in a business in the hopes that it fails and then swoons in and takes over the assets and sells them for a profit.

In a Nov. 1 letter to bondholders, Aurelius urged the trustee, U.S. Bank, not to authenticate new senior notes 6-3/8% notes due in 2023 because Windstream’s 2015 spinoff of Uniti violated an agreement for certain bonds.

“This belief takes into account Aurelius’ view that the 2015 (Uniti) transaction that is the subject of pending litigation gave rise to a large amount of attributable debt,” the Wall Street hedge fund said.

The U.S. District judge’s decision was rendered “moot” on Tuesday after Windstream announced earlier in the day that it had completed early settlement of the previously announced debt swap offers for 7.75% senior notes due in 2020 and 2021, and separate 7.50% seniors notes due in 2022 and 2023.

Windstream said its amended solicitation for the 6 3/8% senior notes due in 2023 that Aurelius sought to stop had received consents from bondholders representing a majority of the outstanding aggregate principal amount, offering to pay the early consent bonus of $2.50 per $1,000 in bonds that were tendered on Nov. 2 rather than the prior deadline of Oct. 24. Windstream spokesman David Avery would not comment on the company’s debt exchange offerings or Aurelius’ recent letter to bondholders, but referred Talk Business & Politics to the telecom provider’s response in U.S. District Court in early October.

WINDSTREAM, UNITI STOCKS STRUGGLE, CREDIT DOWNGRADES

Windstream CEO Tony Thomas, Gunderman and the company’s legal team are likely to get additional questions concerning the debt swap during the Little Rock telecom’s third quarter earnings conference call with Wall Street analysts after the opening bell on Thursday.

Windstream’s stock price has sputtered in trading ever since Aurelius launched its bid to halt the company’s debt offering in early September, trading well below $2 a share at times. On Nov. 3, Windstream’s shares traded just off a 52-week low at $1.77 a share after Moody’s Investors Service downgraded the corporate family rating of Windstream Services to B2 from B1 based on the company’s sustained weak operating trends. Moody’s has also downgraded Windstream’s probability of default rating to B2-PD from B1-PD, its secured rating to B2 from B1 and its unsecured rating to B3 from B2.

“Moody’s does not expect Windstream to generate sufficient cash to fund its share repurchase and reduce debt and, absent a change in (earnings) trajectory, the company’s ratings will continue to face downward pressure,” the Wall Street ratings agency said.
In Tuesday’s session, Windstream’s shares closed up four cents at $1.92 on Nasdaq. The company’s shares have traded in the range of $1.73 a share on the low end and $8.35 a share as a high over the past year.

Uniti shares have also suffered from its dependence on Windstream. On the same day of Windstream’s downgrade, Moody’s also change its credit ratings for Uniti to B2 with a negative outlook, noting that Arkansas REIT gets 70% of its revenues by serving as the landlord for properties where its former parent is the main leaseholder.

“As Uniti’s largest tenant and main source of revenue, Windstream’s credit profile significantly influences the ratings and outlook of Uniti,” Moody’s said. “Given Uniti’s limited revenue diversity, the business and credit risk at Windstream will weigh heavily on Uniti.”

Last week, after the Little Rock REIT reported a $4.1 million third quarter loss, Uniti CEO Kenny Gunderman reminded Wall Street analysts during a conference call that his company was not a party to Windstream’s litigation with Aurelius and U.S. Bank.

“I would remind everyone that Windstream have very competent counsel and advisers involved in the initial spin-off and additional well-respected law firms that will (help) Windstream to ultimately have a favorable outcome, and we anticipate Windstream will continue to comply with the master lease as they have stated publicly they’re intent to do so,” said Gunderman, the brother of Windstream’s CFO. “We are following events very closely and are prepared to act if necessary to protect our shareholders’ interest.”

Uniti shares have traded in the range of $13.81 a share as a low and $29.65 a share as a high over the past 52 weeks. The company’s shares closed Tuesday at $16.53, down 27 cents or 1.6%.