Nearly eight years after former Gov. Mike Beebe and a cadre of state and local government officials convinced Windstream to remain in Little Rock, Arkansas Economic Development Commission (AEDC) executive director Mike Preston told Talk Business & Politics state officials are “closely monitoring” the company’s financial health following Monday’s (Feb. 25) Chapter 11 bankruptcy filing.
“As it’s one of Arkansas’ homegrown Fortune 500 companies, we remain hopeful Windstream will rebound soon and the current financial uncertainty will be remedied,” Preston said in a statement. “Windstream and their valued employees are important to our state and local communities, and we are closely monitoring [Monday’s] news.”
Since forming in 2006, Windstream has been one of the state’s largest technology-related companies since it was formed as a public company following the spinoff of Alltel’s landline business and merger with Valor Communications Group. The move created one of the nation’s largest rural telecom operator’s with annual revenues of $3.4 billion and customers in 16 states.
Four years later, the company made the decision to keep its corporate headquarters in Little Rock after receiving bids from other cities across the country to leave its Arkansas roots behind. However, then-Gov. Beebe and then-Little Rock Mayor Mark Stodola put together an incentive package to keep most of the company’s 825 high-paying corporate jobs in the city.
Under AEDC’s Quick Action Closing Fund, a discretionary fund that allows the state’s chief executive to close deals with key job prospects, Windstream recouped more than $1 million in incentives for building and training between 2010 and 2013. It received another $4.5 million in additional performance-based state incentives tied to performance, although AEDC clawed back $23,000 from the company in 2015 for not fully meeting its job count, AEDC annual reports show.
“I am extremely pleased to announce that Windstream has chosen to make Little Rock its permanent home. In the end, after careful analysis, we decided that the best course for the company was to remain in Little Rock,” former Windstream CEO Jeff Gardner said at the time, following a signing ceremony with Beebe and Stodola.
That decision to formally stay in Little Rock came after Windstream’s five-year lease expired at its current campus in west Little Rock. A spokesperson for newly-elected Little Rock Mayor Frank Scott did not return a phone call seeking comment for this story.
ACQUISITIONS LED TO GROWING PAINS
Fast-forward to 2013, after being named to the Fortune 500 list of largest U.S. companies when company sales grew to $6.2 billion, Windstream had completed eight acquisitions, expanded its operations to 48 states, and made nearly $4 billion in capital investments. By the end of the company’s shopping spree, Windstream had nearly 2,000 employees in Arkansas and 13,500 nationwide.
But a chink in Windstream’s armor began to show in late 2014 after Gardner surprisingly stepped down two weeks before Christmas, and was immediately replaced by Tony Thomas, a former Alltel executive who had risen through the ranks to become CFO. Three weeks before Gardner resigned, Windstream had announced plans to lay off 350 employees nationwide following an earlier 400-worker reduction in that same year.
Under Gardner, Thomas played an integral role in expanding Windstream’s operations and was set to take over as CEO of a new unnamed company that the rural broadband carrier planned to spin off into a publicly-held real estate investment trust.
Less than five months as CEO, Thomas completed his first big deal when Windstream made a splash on Wall Street in April 2015 with the announcement it planned to spin off its telecom network assets into a publicly-traded company called Communications Sales & Leasing Inc., or CS&L, that would trade on the Nasdaq stock exchange.
Under the complex deal, Windstream immediately gave nearly 80.1% of CS&L shares to shareholders. It retained the remaining 19.9% stake in CS&L to pay off debt from earlier acquisitions, while amending its $1.25 billion revolving line of credit to, among other things, extend the maturity date to April 24, 2020.
For its part, CS&L said it has completed its previously announced issuances of $400 million aggregate principal amount of 6% Senior Secured Notes due 2023 and $1.11 billion aggregate principal amount of the 8.25% Senior Notes due 2023. Those notes were issued to Windstream to retire outstanding debt. CS&L also entered into financial arrangements for a $2.14 billion loan and a $500 million revolving line of credit to fund its ongoing operations and purchase communication distribution assets.
But a year later, in another roundabout deal, Windstream sold off half of its remaining stake in CS&L to pay off additional debt. That deal included a transfer of approximately 14.7 million shares of CS&L common stock to its creditors in a debt-for-equity exchange. Citigroup Global Markets Inc. then acquired those shares from the creditors and as a selling shareholder, sold them to institutional accredited investors, including funds managed by Searchlight Capital Partners L.P.
Seven months later, Windstream completed its $1.1 billion acquisition of former rival EarthLink Holdings Corp. of Atlanta on Feb. 27. The company followed up that deal with the smaller purchase of upstate New York cloud solutions operator Broadview Networks Holdings Inc. in an all-cash deal worth $227.5 million.
In the wake of those deals, the Little Rock rural telecom struggled to regain its financial footing, announcing in early August after reporting a second-quarter loss of $68 million that the company was ending its quarterly dividend payout in favor of a new stock buyback program. By the end of the year, after New York vulture fund Aurelius Capital Management filed a lawsuit concerning debt swap offers due between 2020 and 2023, full-year losses had amounted to $2.1 billion on revenue of $5.85 billion at the end of last year.
After waiting more than a year for a decision on the Aurelius lawsuit, U.S. District Judge Jesse Furman for the Southern District of New York ruled on Feb. 15 that Windstream violated bond agreements after it had successfully completed a tranche of debt swap offerings and consent solicitations first announced in October 2017.
Furman’s decisive ruling arose from challenges by Aurelius and U.S. Bank National Association that the 2015 deal was invalid under the terms of a debt exchange offer and consent solicitations in respect to senior notes issued by its Windstream Services LLC to finance the spinoff of the CS&L REIT, now known as Uniti Corp. The court further ruled that Aurelius was entitled to a $310.5 million judgment, plus interest from and after July 23, 2018.
On Monday, Windstream said it and its subsidiaries had filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. The Arkansas company said it will use the court-supervised process to address debt maturities that have been accelerated as a result of the decision by Furman.
CREDIT SWAP REFORMS NEEDED
According to the company’s own balance sheet, the rural broadband carrier currently has total debt outstanding of $5.84 billion, $4.7 billion of which is senior unsecured notes due between 2020 and 2023. In conjunction with Chapter 11 filing, Windstream said it has received a commitment from Citigroup Global Markets, which was involved in the Searchlight debt-for-equity swap in July 2016, for $1 billion in financing.
Following approval by the federal court, this financing, combined with access to the cash generated by ongoing operations, will be available to meet Windstream’s operational needs and continue operating its business as usual, company officials said.
In a column that ran in the Financial Times on Sunday, University of Texas law professor Henry Hu said the valuable financial innovation that Windstream used to close the Uniti deal “is susceptible to opaque gaming and counterintuitive incentives.”
“We badly need reforms, as was underscored when Aurelius Capital Management scored a court victory that may push … Windstream into bankruptcy,” Hu said in his national opinion piece.
Reached by Talk Business & Politics on Monday, Hu reiterated that when creditors are faced with an overstretched borrower, they often choose to work with them. “They may waive breaches of contract or agree to out of court restructurings because they ultimately want the debt repaid,” he said.
The University of Texas legal expert said certain reforms in the credit default swap (CDS) market could be helpful to companies, traditional creditors, investors, CDS sellers, and overall market efficiency.
“For instance, greater disclosure of CDS positions can make sense. But even leaving aside regulatory or industry-wide changes, individual companies, creditors, and investors can try addressing a number of the issues that appear to be at play in the Aurelius/Windstream matter,” he said.
In a recent published academic article, Hu said he discussed a number of recent situations in the market that appear to involve the gaming of CDS’s, calling it “empty creditors with negative economic exposure.” He said extreme empty creditors, such as Aurelius, often have incentives to nudge borrowers into bankruptcy where the payoff exceeds the losses on what they’ve lent.
“And, if Windstream is to be believed — we don’t really know because Aurelius has not disclosed its CDS positions — Aurelius is such an extreme ‘empty creditor,’” Hu said. “If Aurelius turns out to be an extreme empty creditor, this Aurelius/Windstream situation is the significant example of the counterintuitive incentives of such creditors that I’ve long been concerned about.”
Aurelius must confer with the other winning parties and draft a proposed judgment in the $310 million ruling for the federal court’s approval today.