New York court rules Windstream defaulted on debt bonds, must pay $310 million

A federal judge in New York City ruled late Friday evening that Little Rock-based Windstream Holdings had defaulted on its bonds in 2015 during the spinoff of its telecom assets into a company now known as Uniti Corp., the state’s first publicly traded real estate investment trust, or REIT.

That diverse ruling, according to Wall Street analysts, could push Windstream toward the brink of bankruptcy if it is not able to shore up its balance sheet after U.S. District Judge Jesse Furman for the Southern District of New York ruled that Windstream violated bond agreements after splitting off the former Communications Sales & Leasing (CS&L).

Friday’s court decision arose from challenges by Aurelius Capital Management and U.S. Bank National Association that the spinoff 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 Little Rock-based REIT.

In his 55-page ruling, Furman said the influential Manhattan-based court’s task was “not to opine on the financial wisdom of (Windstream) Services’ decisions,” but to enforce the terms of the original debt agreement.

“Doing so here, the Court concludes that (Windstream) Services’ financial maneuvers — and many of its arguments here — are too cute by half,” the ruling stated. “That is, the 2015 transaction qualifies as a Sale and Leaseback Transaction because, in substance, the Transferor Subsidiaries sold the Transferred Assets and then, either directly or indirectly, leased them back; making Holdings the sole signatory on the Master Lease did not change those facts.”

Thurman continued: “And whether or not (Windstream) Services could have waived or cured that breach through a combination of exchange offers and consent solicitations, it failed to do so through the 2017 Transaction for multiple reasons.”

The court further stated that Aurelius was entitled to a $310.5 million judgement, plus interest from and after July 23, 2018. Late Friday evening, Windstream President and CEO Tony Thomas said the Little Rock-based telecom, which itself split from the former Alltel Corp. in July 2006, was stunned by the federal court ruling.

WINDSTREAM DISAPPOINTED BY RULING, WILL APPEAL DECISION
“We are disappointed in, and frankly surprised by, the ruling and will be taking immediate steps to pursue all available options, including post-trial motions and an appeal,” said Thomas. “Additionally, we will work with our creditors on the next course of action. Windstream provides critical voice and data services to customers across the U.S. We remain committed to serving them and ensuring they realize the maximum benefit in transitioning to next-generation technology solutions and premium broadband services.”

Windstream first launched a debt exchange offer and consent solicitations on Oct. 18, 2017 in respect to senior notes issued by its operating subsidiary, Windstream Services LLC, related to the April 2015 creation of the nation’s first REIT solely focused on acquiring and leasing of telecom towers and distribution assets.

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 first announced the debt swaps after U.S. Bank, prompted by an earlier claim in a Delaware Chancery Court in September 2017, filed a lawsuit a month later 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.

In its response to that original lawsuit, Windstream said the U.S. Bank 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 stated in the 38-page federal court filing verified by CFO Bob Gunderman.

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.

Since the lawsuit filed nearly 18 months ago, Windstream and Uniti’s legal battles have also led to stock struggles and credit rating downgrades for both companies after the deal to split off the former CS&L helped the Little Rock telecom unload more than $4 billion in debt.

In recent weeks ahead of the New York court’s ruling, Windstream has sold off key assets to raise nearly $400 million. On Dec. 18, Windstream completed an all-cash ash deal to sell off its dormant dark fiber assets in Minnesota and Nebraska to Arvig Enterprises Inc. for $60.5 million.

Two weeks later, Windstream closed on another all-cash deal on the last day of 2018 to sell of its Earthlink branded internet service for $330 million to Trive Capital, a Dallas-based private equity firm that specializes in investing and acquiring middle-market firms and assets across multiple sectors.

Windstream originally closed on its acquisitions of Earthlink Holdings Inc. in February 2017 for $1.1 billion. Earthlink’s legacy internet business, one of the first ISPs to offer high-speed internet service in the late 1990s, now offers broadband, online back-up, managed web design, web hosting and various email services to over 600,000 customers across the U.S.

“This transaction enables us to divest a non-core segment and focus exclusively on our two largest business units. In addition, it improves our credit profile and metrics in 2019 and beyond,” Thomas said after the deal closed.

Since its merger with Earthlink in 2017, Windstream has struggled to return to profitability as rural consumers in areas where the company operates have vaulted to competitors with faster internet speeds. At Friday’s closing, Windstream shares ended the week up 6.6%, or 21 cents at $3.37. However, in afterhours trading on the Nasdaq stock exchange late Friday evening the company’s shares had lost half of their value, falling a whopping 57% or $1.92 to $1.45 per share.

Uniti’s shares were also caught in the afterhours downdraft after closing Friday up 51 cents at $19.98. After the closing bell, however, Unit’s shares were off 30%, or $5.99 at $13.99 on the Nasdaq. Uniti officials were not available for comment for this story.

Aurelius must confer with the other winning parties and draft a proposed judgment for the federal court’s approval no later than Feb. 15. The case is U.S. Bank v. Windstream Services in the U.S. District Court for the Southern District of New York, located in Manhattan.