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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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