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Wamen Islam

Net Short Debt Activism: The curious case of the Windstream Bankruptcy


"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 !


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