"Rural telecommunications company Windstream Holdings Inc. announced Monday that it filed for Chapter 11 bankruptcy after being hit with a $310 million judgment in a legal loss to a capital management firm.
The Arkansas-based company, which employs about 700 in Rochester and just over 1,000 in New York, recently lost a lawsuit concerning bond agreements with Aurelius Capital Management LP.
Aurelius, a Windstream bond holder, accused the company of violating its bond covenant when it spun off its copper wire and fiber cable business into a new company, Uniti Group, in 2015.
A U.S. district judge ruled in Aurelius’ favor earlier this month and awarded the hedge fund $310 million. At the time, Windstream postponed its fourth-quarter financial results and said it would appeal the decision."
So naturally, I went digging. I was able to pull the actual "Findings of Fact and Conclusions of Law" submitted by the ruling Judge with the US District Court. It was a fascinating read and a bit lengthy, so I summarized the key points/sequence of events that ultimately led to the current scenario and how the violation of the restrictive covenants eventually led to Windstream's downfall.
The bonds in question were Windstream's 6.375% senior unsecured notes due 2023 (CUSIP 97381WAZ7), issued in January 2013. The indenture for these notes included a restrictive covenant which prohibited Windstream and its Subsidiaries from engaging in a "Sale & Leaseback Transaction".
In 2015, Windstream created a REIT which would hold its copper wires and fiber optic cables and the REIT would then lease back these assets to Windstream.
In 2017, Aurelius Capital amassed a stake in the notes of more than 25% of the aggregate principal amount outstanding (to create majority) and provided notice that Aurelius believed Windstream's 2015 transaction was a "Sale & Leaseback Transaction" and in violation of the indenture and hence in default.
To get out of this situation, Windstream tried a couple of tricks. They started to exchange investors out of other bond tranches (with exit consents) into the 6.375% notes due 2023 to try and create a new majority that would outvote Aurelius and agree to waive any default triggered by the 2015 transaction.
However, in the process of issuing the new exchange notes, the principal amount of the refinancing debt (new notes) exceeded the principal amount of the refinanced debt (original notes) by $40MM and the judge found this in violation of a section in the indenture and hence deemed that the votes from the new notes don't count.
The last point was critical as it meant that Windstream could not obtain a waiver of its breach of the "Sale & Leaseback Transaction" and hence constituted into an event of default. The judge granted Aurelius's entitlement of around $ 310MM plus interest.
I found the details of how the case played out to be fascinating, and essentially if Windstream hadn't exceeded their overall indebtedness by $40MM while issuing the new notes they might have been able to engineer an escape !