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I've been involved in a number of OpCo / PropCo distress situations, including Getty Petroleum Marketing / Getty Real Estate Trust and, more recently, ManorCare / Quality Care REIT.
In order to keep this brief, I will list the key issues raised in Seeking Alpha and, in general, I think that many of these problems are poorly understood by many investors and rating agencies.
What would happen in a WIN bankruptcy?
Some interesting provisions of the lease (among many others) are important here. For one, under Sec. 6.1e of the lease, the tenant agreed not to dispute the validity of the lease. So, in my opinion, the only way to challenge a lease is if the creditors are able to win lawsuits for evasion (fraudulent transport) against Windstream (NASDAQ: WIN), which is very difficult for creditors WIN to win because WIN (Services) received more than $ 7.75 billion ($ 1.035 billion in cash, $ 2.477 billion in debt and $ 4.275 billion in equities).
WIN's services transferred the assets in 2013 to WIN & s Holdings and, in 2015, completed their spin-off activities and were remunerated. The assets immediately sold or sold the securities to generate cash. To be fair, I did not consider the compensation received by the Services when the assets were transferred to Holdings in 2013. There could be a significant claim from InterCo for the 2013 transaction, which could be considered too low by creditors bankruptcy hearing.
Nevertheless, I think that it would be very difficult for creditors to avoid the lease and I assume that the lease will be considered valid. For this purpose, this lease will be treated in the same way as other leases in the event of bankruptcy.
WIN will have 60 days after the filing of the application for Chapter 11 to accept or reject the lease. Until that date, under 365 (D), WIN will have to comply with the existing rent conditions. If WIN can not do this, Uniti (NASDAQ: UNIT) may force the judge to force him to do so. I attended the hearing during which Getty Petroleum Marketing ("Getty Petroleum") attempted to withhold rent from Getty Real Estate Trust ("Getty Realty"). Getty's lawyer was Greenberg Traurig and Getty Realty's lawyer was Wachtell, Lipton. I have never seen a motion shoot down so quickly. Greenberg Traurig was shot so quickly that the hearing lasted less than 45 minutes. The bankruptcy code is extremely firm: if a tenant wants to take advantage of the use of real estate in a bankruptcy, then he must pay rent.
WIN will have 60 days subject to an extension to accept or reject the lease. If WIN accepts the lease, WIN will have to accept the lease in its current form without any changes. If WIN refuses the rental agreement, UNIT will be entitled to a maximum of 1 year lease payment or 15% of the balance of lease payments, with a maximum of 3 years. By using rudimentary calculations, this claim would exceed $ 1.1 billion (I do not include lease increases or pecuniary damages), plus UNIT would be free to resell the assets to another party. However, I feel that the rejection of the lease in a US BK is extremely unlikely and impractical. UNIT owns all the fiber distribution panels and each externally connected connection, all the customer demarcation points in fiber and all fiber / copper leading to the network interface devices. WIN has copper and fiber optic link cables, (hard-to-remove) cabinets, network interface equipment and peripherals. This network is used by CLECs and ILECs for almost all the states in which WIN operates. Rejecting the lease would be almost impossible for WIN because WIN does not have any competing network that it could access, and it would take years and billions of dollars. build a new network of this size.
Outside bankruptcy
Apart from the bankruptcy, WIN could use various options to reduce the rent paid to UNIT. WIN could try to reduce its rent through good faith negotiations with UNIT and UNIT could reduce rent to reduce the pressure on WIN. However, UNIT is heavily indebted and has repeatedly said that it will not reduce rent. I do not see any restrictive covenants in the UNIT debt nor any clauses in the lease that prohibit a reduction in rent. Although, I think at this stage, it is highly improbable given the structural situation of UNIT and the current financial situation of WIN.
The second thing WIN could do is to withhold rent and play games with UNIT and force him to declare a default on the lease. That's what ManorCare did with Quality Care last year with limited success before it went bankrupt. ManorCare was able to renegotiate a rent suspension but had limitations. However, the main lease between UNIT and WIN contains a very powerful layout, which Quality Care did not have. UNIT has the right to transfer the lease to another party and sell the assets of WIN ("Communication Asset"). I think the market is lacking this provision of the lease and many offices say that UNIT can not exclude WIN given its status as a carrier of last resort – but that's false. WIN's assets include employees and essentially constitute the operational component of the company located above the UNIT infrastructure. UNIT is also permitted to be a bidder in an auction if the assets are not sold at fair market value ("FMV"). An auction would only bring very little value to WIN, paying for communication assets only representing a fraction of its current business value. It would be preferable for WIN to restructure in accordance with Chapter 11 rather than having its assets auctioned. The lease with UNIT is likely to scare bidders who, in my opinion, are above the market (30-50% prob) and UNIT could refuse to reduce it in order to win the auction at a modest price. Therefore, I think that UNIT would essentially own all the activities (excluding 20% of WIN activities not operated on the UNIT network) for very little. I think that WIN's ability to play games or withhold rent to negotiate a better rental rate is extremely unlikely.
summary
I think WIN has limited options in its ability to renegotiate a lease with UNIT. In the event of bankruptcy, WIN will have to continue to pay the rent and will have to assume the lease under current conditions or find a new network, which may not be possible.
Apart from the bankruptcy, UNIT seems to strongly reject the idea of negotiating a lower rent payment and, given the losses that WIN would suffer in the event of breach of the lease, WIN would be unlikely to rental compared to chapter 11.
In conclusion, I believe that UNIT will continue to receive its WIN rent payment without modification in the foreseeable future. And if rent concessions were granted, UNIT would receive a consideration (WIN secured debt or cash) or equity.
Disclosure: I am / we are a long time UNITE. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
Additional information: This is not an investment research. UNIT / WIN is an extremely complicated structural special situation and my writings are my interpretations of various legal documents as well as previous precedence in bankruptcy and lease negotiation. These interpretations have not been verified by counsel, the respective companies or anyone except me. This is not a recommendation to buy or sell a title and should in no way be construed as such.
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