LR firm in peril after loss in court
Windstream split broke bond rules
The fate of Little Rockbased Windstream Holdings Inc. was cast into doubt Friday after a court ruled that the rural phone company defaulted on its bonds in 2015 by spinning off Uniti Group Inc.
The ruling in Manhattan federal court is a victory for New York hedge fund Aurelius Capital Management LP, which contends that the deal unfairly stripped bondholders of assets that back up their investment. Windstream, which serves about 1.4 million consumers and small businesses in 18 states, has warned that a defeat could force it to seek bankruptcy protection or liquidation.
Actions by Windstream Services amounted to a breach of its financial covenants, and Aurelius is entitled to a $310 million judgment, according to the ruling. The court also dismissed Windstream’s counterclaims against Aurelius.
“The court concludes that Services’ financial maneuvers — and many of its arguments here — are too cute by half,” Judge Jesse Furman said in the decision.
Windstream plans to appeal. It issued a statement from President and Chief Executive Officer Tony Thomas, who said in part: “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. Additionally, we will work with our creditors on the next course of action.”
The ruling came after months of waiting for a verdict following a trial that ended in July, and repeated assurances from management that Windstream was confident of a favorable verdict. “We clearly look forward to getting that, so we can get on to refinancing the balance sheet,” Chief Financial Officer Robert Gunderman said at a Dec. 5 investor conference.
Aurelius, led by Mark Brodsky and known as one of the most tenacious distressed-debt investors, has been pressing for immediate repayment on Windstream bonds it holds.
The case began in 2017, when Aurelius alleged a default on Windstream’s 6.375 percent senior notes due in 2023. The hedge fund held more than 25 percent of the notes affected, with more than $310 million estimated at stake in principal and interest.
At the core of the dispute is how Windstream handled the transfer to Uniti of assets including miles of copper wire and fiber optic cables. Aurelius and the trustee, U.S. Bank National Association, say the deal constituted a sale and leaseback transaction, which was prohibited by the indenture on the notes.
Aurelius will confer with the other parties and draft a proposed judgment by Feb. 25, according to the ruling.
Windstream shares rose 6.7 percent to close Friday at $3.37. They fell more than 40 percent in extended trading after news of the ruling. Shares of Uniti Group Inc. rose 51 cents, or 2.6 percent, to close Friday at $19.98. The shares were down 27 percent in extended trading.
The case is U.S. Bank v. Windstream Services, 17-cv07857, U.S. District Court, Southern District of New York (Manhattan).
Information for this article was contributed by Rick Green and Josh Saul of Bloomberg News.