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Allison McNeely and Tiffany Kary

Bloomberg February 15, 2019

The fate of Windstream Holdings Inc. was cast into doubt after a court ruled that the rural phone company defaulted on its bonds in 2015 by spinning off Uniti Group Inc. Windstream shares fell as much as 43 percent in extended trading.

The ruling on Friday 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 the company’s Windstream Services unit breached covenants of bonds it issued, and Aurelius is entitled to a $310 million judgment, Judge Jesse Furman said in the decision. Little Rock, Arkansas-based Windstream said in a statement that it was pursuing options including an appeal.

“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,” Tony Thomas, Windstream’s president and chief executive officer, said in the statement.

Representatives for Uniti and Aurelius didn’t respond to messages seeking comment. Uniti’s shares also fell more than 20 percent in late trading.

Surprise Verdict

With the company looking to appeal “any consequences are unlikely to happen in the very near term,” said Matthew Dolgin, an analyst who follows Windstream for Morningstar Inc. “If the verdict was upheld throughout all potential appeals, we think there is a reasonable probability that Windstream would be forced into bankruptcy.” Customers probably won’t notice major effects, with the company more likely to reorganize than liquidate, Dolgin said.

Furman also dismissed Windstream’s counterclaims against Aurelius, saying that the company’s “financial maneuvers — and many of its arguments here — are too cute by half.”

Investors had been waiting for a verdict for months following a trial that ended in July, with repeated assurances from management that Windstream was confident it would get 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.

Tenacious Opponent

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 fund stands to profit on any notes it bought at a discount, and possibly derivatives known as credit-default swaps that pay off if a company fails to honor its debts.

That could happen because the default ruling may entitle holders of other Windstream bonds and loans to demand immediate repayment, too, a scenario that could leave the company insolvent.

The case began in 2017, when Aurelius alleged a default on Windstream’s 6.375 percent senior notes due 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 involved and draft a proposed judgment by Feb. 25, according to the ruling.

The case is U.S. Bank v. Windstream Services, 17-cv-07857, U.S. District Court, Southern District of New York (Manhattan).

(Adds Windstream statement starting in the third paragraph.)

--With assistance from Josh Saul and Olga Kharif.

To contact the reporters on this story: Allison McNeely in New York at amcneely@bloomberg.net;Tiffany Kary in New York at tkary@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net;Shannon D. Harrington at sharrington6@bloomberg.net

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