Windstream, Uniti to appear in federal bankruptcy court amid stalled lease negotiations

Windstream Holdings Inc., Uniti Corp. and other parties are scheduled to appear in federal bankruptcy court in upstate New York Friday (July 26) concerning a request by unsecured creditors and trustees in the Windstream Chapter 11 bankruptcy filing to end or significantly alter a master lease contract between the closely-tied Little Rock telecom concerns.

The hearing is scheduled to be held in federal court White Plains, New York, as part of broader proceedings before Honorable U.S. District Judge Robert Drain involving Windstream’s Feb. 25 default in the Manhattan-based U.S. Bankruptcy Court for the Southern District of New York.

Windstream and its affiliated operating subsidiary, Windstream Services LLC, also filed a 54-page complaint on Thursday (July 25) in the federal bankruptcy court against Uniti and its various state-held real estate investment trust vehicles to resolve ongoing disputes related to Windstream’s spinoff of the Little Rock REIT in April 2015.

Further, Windstream has requested Judge Drain to stay a Sept. 23 deadline to accept or reject the leases due to expire in 2030 as negotiations between the Fortune 500 telecom and its former real estate subsidiary appear to have stalled. Windstream, which was granted a six-month extension by Drain on June 17 to file its reorganization plan by the end of the year, can’t move forward without resolving the ongoing dispute with its current landlord.

“Our goal remains to emerge from our court-supervised restructuring as quickly as possible with the best possible terms for Windstream, our stakeholders and our customers,” Windstream General Counsel Kristi Moody said in a statement to Talk Business & Politics. “Our preference is to reach a mutually agreeable resolution with Uniti through mediation, but we also are now positioned to rapidly pursue an alternate path through the court if necessary.”

Uniti and Windstream entered into negotiations earlier this summer on the master lease agreement after the latter filed voluntary petitions for reorganization in late February under federal Chapter 11 rules. The controversial lease agreement provides for annual rent of $659 million to Uniti paid in equal monthly installments in advance, with an annual base rent escalator of 0.5%, according to securities filings.

Federal bankruptcy law requires that Windstream continue to make regular rent payments to Uniti during its bankruptcy in order to maintain access to the broadband operator’s network. Windstream has continued to make the required timely rent payments, according to a statement made by both Little Rock-based companies in bankruptcy court filings.

Uniti filed an objection last week to halt the use of a mediator in negotiations with Windstream in response to a motion filed by U.S. Bank and other unsecured creditors and indentured trustees to end the master lease. Uniti’s objection also responded to various similar claims and allegations raised in the motion filed by Windstream’s unsecured creditors committee (UCC).

In the original court decision that pushed Windstream into bankruptcy, U.S. District Judge Jesse Furman’s ruling first arose from challenges by Aurelius Capital Management and U.S. Bank that the spinoff of the Uniti was invalid under previous financial arrangements with Windstream. The court ruled on Feb. 15 that Aurelius was entitled to a $310.5 million judgment, plus interest.

Uniti said in a July 19 court filing that it believes pleadings by bankruptcy trustees and the U.S. Bank-led group contain factual and legal flaws and inconsistencies.

“Under appropriate legal tests, Uniti is confident the master lease is a ‘true lease,’ and every serious analysis of it ever performed by specialists has reached that conclusion,” the company said. “Uniti is confident that a careful examination of the evidence (including many of the very documents cited by UMB, U.S. Bank, and the UCC) will confirm that the master lease is a true lease, as it was asserted to be by Windstream and its advisors when it was executed.”

In a follow-up court filing on Tuesday, Uniti softened its stance, saying that it has always advocated for an efficient, negotiated resolution of its relationship with Windstream, “which could optimize both parties’ businesses, substantially increase the size of the available pie, and, crucially, minimize the time that Windstream needs to spend in Chapter 11, and the attendant harm to its business.”

“Mediation could be an important step towards achieving that goal, and Uniti supports mediation in the hope that it will help bring order to the process and allow the parties to focus on the important work of developing a viable restructuring plan for Windstream,” Uniti said in the three-page court filing by Wall Street law firm Davis Pol & Wardwell LLP.

In its complaint on Thursday, Windstream refers to the rental agreement with its former subsidiary as the “Uniti Arrangement,” noting that contract is not a “true lease.” Calling this arrangement “a lease rather than what it actually is, a financing, in and beyond the multiparty context of Chapter 11 gives license to a long-term transfer of billions of dollars of value away from the Debtors to the everlasting and irreparable detriment of their creditors,” states Windstream.

Windstream also reiterated an earlier statement made by CEO Tony Thomas in a first quarter conference call that the assets it has leased from Uniti after the April 2015 closing of the $3 billion spinoff were depreciating at “such a precipitous clip that almost all — if not all — of their remaining useful life was going to be consumed during the initial 15-year lease term, leaving insufficient residual interest to support a true lease finding.”

“Moreover, the initial 15-year lease term is itself inaccurate. Because the transferred network assets composed a large portion of Windstream’s operations, Windstream expected to renew some (or all) of those leased assets for multiple renewal terms,” the Little Rock telecom argued. “Indeed, in the months leading up to the Uniti Arrangement, Windstream’s statements to regulators (focused on continuity of service in their states) made clear that Windstream was going to extend the Master Lease beyond years so long as the leased assets retained meaningful economic value.”

All responses and motions concerning Windstream’s complaint are due in federal court by Aug. 13. Judge Drain is expected to take up the complaint a week later in the Manhattan federal court.