Bankruptcy court hearing to consider $20.1 million bonus retention plan for top Windstream execs

A federal bankruptcy court judge in New York has scheduled a May 14 hearing to consider Windstream Holding’s request for $20.1 million in bonuses to retain five “key” executives to steer the company through its Chapter 11 reorganization, company officials told Talk Business & Politics.

The hearing before U.S. District Judge Robert Drain for the United States Bankruptcy Court for the Southern District of New York comes after Windstream’s Chapter 11 bankruptcy filing on Feb. 25, which allows the former Alltel Corp. landline subsidiary to submit a reorganization plan for its debt within 120 days.

The executive retention plan, known as “Key Employee Incentive Program,” or KEIP, comes halfway through the scheduled four-month bankruptcy proceedings where Windstream is seeking approval for its strategic plan. That plan will detail how Windstream will restructure its operations in 2019, and emerge from Chapter 11 as a healthier financial concern.

The KEIP would benefit five top executives considered “insiders” under the federal bankruptcy code, including company President and CEO Tony Thomas, CFO Robert Gunderman, General Counsel Kristi Moody, Layne Levine, president of the Little Rock telecom’s Enterprise & Wholesale division, and Jeffrey Small, president of the company’s fast-growing Kinetic internet business.

Windstream’s former General Counsel and Chief HR Officer John Fletcher, who was the sixth member of the company’s executive team, was terminated earlier this year. A U.S. Securities and Exchange Commission filing shows that Fletcher’s severance package was more than $1.14 million.

Windstream first announced in late February that its holding company and subsidiary, Windstream Services LLC, had filed voluntary petitions for reorganization under Chapter 11 in the federal bankruptcy court in New York City. That default was precipitated by a Feb. 15 court ruling by U.S. District Judge Jesse Furman for the Southern District of New York that Windstream violated bond agreements after splitting off Arkansas’ first publicly held real estate investment trust in April 2015. That company was formerly known by the bulky name of Communications Sales & Leasing, but changed its name to Uniti Corp. two years ago.

Furman’s 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 Windstream Services LLC to finance the spinoff of Uniti Corp. The court further ruled that Aurelius was entitled to a $310.5 million judgment, plus interest from and after July 23, 2018.

INCENTIVIZED MANAGEMENT TEAM
In making the case for the multimillion-dollar bonus plan, Windstream argues that efforts by its executive team are necessary to “maintain a high level of business performance, which in turn minimizes disruption to customers, vendors, and employees.”

“The Debtors commenced these Chapter 11 cases on an expedited basis and are only now developing their comprehensive restructuring strategy. Maintaining a properly incentivized senior management team is critical to the efficient and effective completion of the great deal of work necessary to emerge from Chapter 11,” Windstream states in its April 23 court filing. “Ultimately, incentivizing the Debtors’ senior management team will  inure to the benefit of all stakeholders by facilitating a value-maximizing resolution to these Chapter 11 cases.”

Based on the plan drawn up by Windstream’s legal team and independent compensation consulting firm Willis Towers Watson, the five executives will split a payout of $20.06 million by the end of 2019 if performance thresholds are met. The KEIP plan will provide for potential awards representing a range from 50% of target payment for threshold performance, and up to 200% of target payment for maximum performance, the federal court filing states. However, if the Windstream executives are fired for cause or without good reason before Dec. 31, 2019, the KEIP plan also has a “claw back” provision if certain targets are not met.

If approved, Thomas would be paid a maximum award of nearly $10.3 million, followed by $3.8 million and $2.3 million for Gunderman and Levine, respectively. The bonus structure for Small and Moody would come in at nearly $2.2 million and $1.6 million each.

“The Debtors respectfully submit that such award opportunities are a reasonable, market-based approach and are justified under the circumstances of these Chapter 11 cases,” Windstream states in court filings.

Windstream further states that the KEIP participants have already met most of the challenges for the bonus plan by directly engaging vendors and services providers to maintain stability and seamless performance across the company’s businesses. Without the plan, the court filing states, the Windstream executive team would continue to earn their base salaries set before the bankruptcy filing in late February.

“The performance targets will require the KEIP participants to continue to ‘manage through’ the (Windstream’s) Chapter 11 filings,” states the 23-page court filing. “The Debtors do not believe that KEIP participants can achieve the performance targets simply by ‘showing up.’”

NON-INSIDER BONUS PLAN
In addition to the KEIP plan, Windstream is also asking the federal bankruptcy judge to approve a smaller $5 million retention plan to be paid in two installments to an unknown number of “non-insider” employees instrumental to the rural telecom’s success and day-to-day operations.

“(S)ince the commencement of these Chapter 11 cases, many employees have been forced to undertake tasks beyond the scope of their usual pre-petition work,” the court filing states. “(Windstream) must retain employees who are integral to the Debtors’ ongoing business operations to preserve and maximize value during these Chapter 11 cases, successfully complete their restructuring, and emerge on a timely basis from (bankruptcy).”

Under this plan, known as the “Key Employee Retention Plan,” or KERP, participants in the program will be determined later by Thomas. They range from company executives at the EVP, SVP, VP level who can earn a one-time bonus up to $200,000, $140,000, and $80,000, respectively, while individual contributors, staff managers and other lower-level employees on the bottom rung can make up to $10,000.

In between, senior directors and top sales personnel, and directors can earn up to $30,000 and $25,000, respectively. If approved by the bankruptcy court, Windstream said it expects to hand out between $3.5 million and $4 million immediately and save the remainder for “reactive needs” that develop.

“In no circumstance will an individual receive an award over the amount of $250,000. In determining which employees will receive KERP grants, (Windstream’s) management team will consider high retention risk and/or essential to ongoing operations, key sales personnel, and employees with a heavier workload due to the bankruptcy cases,” court filing states.

EARNINGS REPORT
As Windstream officials prepare for next week’s hearing in New York City, company spokesman David Avery told Talk Business & Politics the Arkansas telecom is also finalizing the date to report its first quarter earnings. In March, Windstream closed out a disappointing fourth quarter and fiscal 2018 with red ink of $549 million and $723 million, respectively. Wall Street expects the former Fortune 500 telecom to report a first quarter loss of $2.87 cents per share on revenue of $1.4 billion.

In an updated financial plan filed with the KEIP and KERP plans, Windstream forecasts operating income of $1.76 billion in 2019, a decline of 4% year-over-year. Thomas, who had inked a 5-year, multi-million-dollar employment deal just ahead of the bankruptcy filing, has said Windstream still expects to see strong growth in 2019, especially with the rapid expansion of the company’s fiber-based Kinetic internet service to rural consumers and business owners.

In 2018, Windstream generated $1.97 billion in so-called adjusted OIBDAR, or operating income before depreciation and amortization, a decline of 2% year-over-year but an improvement from a 5.5% decline in 2017. At the end of 2018, Windstream had 11,945 employees, including 1,340 union employees under collective bargaining agreements. The Little Rock-based telecom offers bundled broadband services to consumers and businesses across the company’s 150,000 fiber network primarily in rural areas in 18 U.S. states.