Windstream files for bankruptcy after losing 18-month legal battle

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Windstream Holdings has filed for bankruptcy protection after an 18-month legal fight with hedge fund Aurelius Capital Management came to an abrupt end.

Windstream and all of its subsidiaries filed for voluntary Chapter 11 petitions, which allow a business to file a reorganisation plan usually involving a corporation or partnership for its debt over a 120-day period, in the US Bankruptcy Court for the Southern District of New York yesterday.

The company is using the court-supervised process to address debt maturities that have been accelerated as a result of the recent decision by Judge Jesse Furman in the Southern District of New York against Windstream Services, LLC, a subsidiary of the company. The company was hit with a $310 million judgement in the legal loss against the hedge fund.

“Following a comprehensive review of our options, including an appeal, the Board of Directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact of Judge Furman’s decision and the impact it would have on consumers and businesses across the states in which we operate,” said Tony Thomas, president and CEO of Windstream.

Interestingly, according to a Federal Securities and Exchange Commission 8K filing on Friday, Thomas entered into an employment agreement that “replaces and supersedes” his previous contract dated 1 September 2017. Under the new terms of the agreement, he will continue to serve as Windstream’s president and CEO, as well as keep his seat on the company’s nine-person board from 19 February 2019 to 1 March 2024, at a minimum annual base salary of $1 million. He also received a one-time cash award of $2 million that will vest in three years.

Judge Furman’s decision

Judge Jesse Furman ruled on 15 February that Windstream Services’ April 2015 spinoff of certain telecommunications network assets into a real estate investment trust (REIT), Communications Sales & Leasing (CS&L), now known as Uniti Corp, violated its agreements with bondholders. The decision arose from challenges by Aurelius Capital Management and US Bank National Association that the spinoff was invalid under the terms of those agreements.

In his 55-page ruling, Furman said the court’s task was “not to opine on the financial wisdom of (Windstream) Services’ decisions,” but to enforce the terms of the original debt agreement. “Doing so here, the Court concludes that (Windstream) Services’ financial maneuvers — and many of its arguments here — are too cute by half,” the ruling stated. “That is, the 2015 transaction qualifies as a Sale and Leaseback Transaction because, in substance, the Transferor Subsidiaries sold the Transferred Assets and then, either directly or indirectly, leased them back; making Holdings the sole signatory on the Master Lease did not change those facts.”

Furman continued: “And whether or not (Windstream) Services could have waived or cured that breach through a combination of exchange offers and consent solicitations, it failed to do so through the 2017 Transaction for multiple reasons.”

“Windstream strongly disagrees with Judge Furman’s decision,” Thomas said. “The company believes that Aurelius engaged in predatory market manipulation to advance its own financial position through credit default swaps at the expense of many thousands of shareholders, lenders, employees, customers, vendors and business partners. Windstream stands by its decision to defend itself and try to block Aurelius’ tactics in court. The time is well-past for regulators to carefully examine the ramifications of an unregulated credit default swap marketplace.”

The effect of Judge Furman’s decision was that an event of default under the relevant indenture had occurred that had not been cured or waived. The acceleration of the obligations outstanding under such indenture gave rise to a cross-default under the indentures governing Windstream’s other series of secured and unsecured notes. In addition, the decision gave rise to a cross-default under the credit agreement governing Windstream’s secured term and revolving loan obligations.

Chapter 11 & $1bn financing

Thomas said Windstream did not arrive in Chapter 11 due to operational failures and currently does not anticipate the need to restructure material operations. “Taking this proactive step will ensure that Windstream has access to the capital and resources we need to continue building on Windstream’s strong operational momentum while we engage in constructive discussions with our creditors regarding the terms of a consensual plan of reorganisation. We acted decisively to secure the long-term financial stability of Windstream, and we are confident that, upon completion of the reorganisation process, we will be even better positioned to invest in our business, expand our speed and capabilities for our customers and compete for the long-term.”

Windstream has received a commitment of $1 billion in debtor-in-possession (DIP) financing from Citigroup Global Markets. Following approval by the Court, this financing, combined with access to the cash generated by the company’s ongoing operations, will be available to meet Windstream’s operational needs and continue operating its business as usual.

In conjunction with the filing, the company has filed a number of customary first day motions. These motions will allow the company to continue to operate in the normal course of business without interruption or disruption to its relationships with its customers, vendors, channel partners and employees. The company expects to receive Court approval for these requests and intends to pay vendors in full for all goods received and services provided to Windstream after the filing date.

“With approval from the Court, we will continue paying our employees, maintaining our relationships with our vendors and business partners and serving our customers as usual. We remain committed to providing critical voice and data services and ensuring customers realise the maximum benefit in transitioning to next-generation technology solutions and premium broadband services,” added Thomas.

Windstream acquired EarthLink for $1.1 billion in February 2017, gaining 145,000 route miles of fibre and a large enterprise and business customer base. This was soon followed with a $227.5 million acquisition of unified communications firm Broadview. In February 2018, the company launched new brands for its enterprise and wholesale business. A month later, Windstream Holdings completed its $37.5 million acquisition of Mass Communications, the New York-based telecommunications network management company, in an all cash deal. At the end of 2018, Windstream offloaded EarthLink’s legacy consumer business to private equity firm Trive Capital in a deal worth $330 million