One week after a federal judge handed down a ruling that could push Windstream Holdings into default, the Little Rock telecom’s board of directors inked a new five-year employment deal with the company’s chief executive officer even as the rural carrier’s troubled shares enter penny stock territory.
According to a federal Securities and Exchange Commission 8K filing on Friday (Feb. 22), Windstream and Company President and CEO Tony Thomas entered into an employment agreement that “replaces and supersedes” his previous contract dated Sept. 1, 2017. Under the new terms of the agreement, Thomas will continue to serve as Windstream’s president and CEO, as well as keep his seat on the company’s nine-person board from Feb. 19, 2019 to March 1, 2024.
Under the five-year pact, subject to annual renewals, Thomas’ annual base salary will not be less than $1,000,000 and his annual bonus target will not be less than 188% of his base salary, which amounts to more than $1.8 million. Following the deal’s signature on Friday, Thomas was also awarded a one-time cash award of $2 million that will vest in three years.
Thomas, a former Alltel Corp. executive and Windstream CFO who took over the CEO’s role in December 2014, is also eligible to participate in all equity incentive, employee benefits and perquisite plans, programs and arrangements that are provided to other senior executives of Windstream, officials said.
In the SEC filing, Windstream officials said the terms of the employment pact with Thomas are consistent with his previous employment contract, except that the term has been extended to March 1, 2024 and now includes the company’s operating subsidiary, Windstream Services LLC, as a party.
Windstream’s board of directors also said that negotiations for the new employment pact began prior to the federal court ruling on Feb. 15 by U.S. District Judge Jesse Furman for the Southern District of New York that the Little Rock Fortune 500 firm had violated bond agreements after splitting off the former Communications Sales & Leasing (CS&L) in April 2015.
“The Board of Directors initially discussed entering into the agreement in early February at its regularly scheduled quarterly board meeting. The Board of Directors and Mr. Thomas were finalizing the agreement at the time Windstream received a negative court ruling in the Southern District of New York,” the company explained. “Mr. Thomas’ continued leadership and performance are critical to the success of Windstream and provide the continuity and stability needed for the Company to focus on serving customers and all other stakeholders while the Board of Directors and management evaluate Windstream’s options.”
The Windstream board, which is led by Chairman Alan Wells, a private equity investment banker, said it determined that extending Thomas’ employment is in the best interest of the company and its stakeholders “and confirms both the Board of Directors’ and Mr. Thomas’ long-term commitment and confidence in the future of Windstream.”
Despite the confidence of the Windstream board of directors, Wall Street analysts, investors, bondholders and credit raters are not as assured that the Little Rock-based rural broadband provider can remain out of bankruptcy court following last’s week federal court decision.
Furman’s decisive ruling arose from challenges by Aurelius Capital Management 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 a Little Rock-based REIT, CS&L, which is now known as Uniti Corp. The court further ruled that Aurelius was entitled to a $310.5 million judgement, plus interest from and after July 23, 2018.
In an unusual statement on Tuesday, Aurelius issued a terse news release that ridiculed the Windstream board and Thomas’ confidence in the telecom’s future prior to the federal court ruling. In a statement mocking Thomas and the Windstream board, Aurelius officials said the Wall Street hedge fund was gratified by the Manhattan federal court’s decision that the company’s senior 6-3/8% notes due 2023 should not have been accelerated.
“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,” Aurelius said in a one-page statement.
“We take no pleasure in Windstream’s resulting financial predicament. Windstream could easily have averted it – first by not playing fast and loose with its noteholders in 2015, hoping nobody would hold the company to account, and second by settling,” said the Aurelius statement. “Instead, Windstream wasted an exorbitant amount – more than would have been needed to settle with us at the time – on an ineffective exchange offer and then on litigation.”
MOODY’S: WINDSTREAM’S LIKELIHOOD OF DEFAULT HAS INCREASED
On Friday, Windstream’s financial woes continued to worsen after Moody’s Investors Service downgraded the corporate family rating (CFR) of Windstream Services to Caa3 from Caa1. The Wall Street credit rating service also downgraded the probability of default rating (PDR) to Caa3-PD from Caa1-PD, noting that both downgrades were prompted by the federal court ruling.
“Moody’s views this legal outcome for Windstream as a negative that increases default risk and impairs refinancing actions that might have further strengthened its balance sheet in the intermediate term,” said Neil Mack, vice president and senior analyst for Moody’s Corporate Finance Group.
Mack also noted while the adverse ruling raises uncertainty, including the possibility of a restructuring or bankruptcy filing, Windstream indicated it was continuing to evaluate its options, including post-trial motions and an appeal.
“However, Moody’s believes the likelihood of default has increased following the Court ruling. Moody’s believes Windstream’s efforts to resolve this adverse ruling in its favor and adequately address near-term maturities and liquidity needs will be difficult,” said Mack. “While the ongoing dispute remains unresolved, Windstream may encounter difficulties accessing funds to refinance its debt maturities, most notably the company’s $1.03 billion drawn revolving credit facility expiring April 24, 2020 and $78 million unsecured notes maturing October 15, 2020.”
That ability to raise capital and improve cash flow could also be further impeded by the weeklong collapse of Windstream’s stock. At Tuesday’s (Feb. 19) closing bell, Windstream shares had lost nearly two-thirds of their value as the company’s stock declined by a whopping 61%, or $2.06, at only $1.31 on the NASDAQ stock exchange.
By Friday, the Little Rock-based Fortune 500 telecom’s stock had slumped well below $1, declining 10 cents at 85 cents as more than 6.56 million shares traded hands. Under NASDAQ rules, Windstream stock must remain at or above $1 for 30 days to stay listed on the exchange.
Uniti, the publicly held real estate investment trust (REIT) that split off from Windstream nearly four years ago, has also lost more than half of its market value in the past week. The company’s shares are closely tied to Windstream because the Little Rock telecom is the company’s largest customer and is obligated for more than 60% of its revenues due to a lease-back agreement with its former parent firm.
At Friday’s close, Uniti’s stock ended the week at $9.23 on the Nasdaq, down 76 cents or 7.6%, with trading volume of 19.5 million shares. Since the federal court ruling on Feb. 15, the Little Rock REIT’s stock has declined 53.8%.
Meanwhile, Windstream has postponed its fourth quarter and yearly earnings report until March 18. Uniti is expected to report its fourth quarter and year-end 2018 financials after the close of market on Thursday, Feb. 28.