We last covered Uniti Group (UNIT) claiming that the dividend was supposed to have a big hit.
Based on the evidence presented above and the fact that in almost all the results it is better for UNIT to keep more cash than less, UNIT has a higher probability of reducing the dividend. This is true even though WIN leases are held as is. Our latest option calculation showed that an annual dividend of 40 cents (10 cents per quarter) is the most likely payment, but we'll know for sure soon. We will also return to this theory that dividend reductions can never be truly "integrated".
UNIT said only $ 0.05 for the quarter and surprised us with a rather appropriate statement during the teleconference and almost echoed our thoughts.
For the 2019 taxation year, dividends attributable to our share capital can be raised to approximately $ 180 million, including the dividend paid in January of this year. Over the next four quarters, our dividend could reach a little less than $ 70 million, or about $ 0.37 per common share, under our credit agreement. Assuming that the board states that the total amount of $ 0.37 for the 2019 taxation year represents an annualized return of approximately 3.8% over the next four quarters, based on recent trading levels.
This is an excellent initiative for UNIT because it is now a question of survival. The hand of UNIT was forced by its bankers and the leap in funding rates, from LIBOR + 300 basis points to LIBOR + 500 basis points, certainly gave a religion to UNIT.
Business at risk
The UNIT auditors have decided to insert in their 10-K clause the "continuity of exploitation", quite disturbing.
Certain conditions and events raise significant doubts about our ability to continue our business and in our opinion on our financial statements as at December 31, 2018, PricewaterhouseCoopers, our chartered and independent accounting firm, expressed significant continuation of our activities. in operation within one year from the date of preparation of the financial statements, following Windstream's petition for bankruptcy and any uncertain effects on the principal lease. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We expect Windstream to continue to execute on the main lease and we do not believe that Windstream is likely to reject it as Windstream is at the heart of Windstream's operations. We also intend to reduce our capital expenditures and dividends, as well as seek external financing to support our operations.
Source: UNIT 10-K
By and large, PWC questioned UNIT's ability to remain a viable entity for a year. Although auditors are entitled to their opinion, we believe that this was a vast oversight of the accounting rules in effect. FASB ASC 205-40 indicates when "active" language should be used (emphasis added). The key word here is "likely".
In summary, the FASB ASC 205-40 provides the following new guidance following ASU publication # 2014-15: 1. Defines the term of Serious Doubt as to the capability of a Entity to continue operating (significant doubt) as follows: There is substantial doubt about an entity's ability to maintain its current situation while the conditions and events, taken as a whole, indicate that it is: likely that the entity will not be able to meet its obligations when they become due in the year following the date of preparation of the financial statements (or in the following year the date the financial statements are available, if applicable). The probable termis used according to its use in topic 450 on the unexpected.
Now, most people use the probable word to indicate a probability greater than 50%. This is also exactly how International Financial Reporting Standards (IFRS) use this term. However, US GAAP has a very different interpretation.
The definition of probable means that there should be a probability of about 80% that the event occurs (it is we who underline).
SC 450-20-20 defines the term "likely" as "likely to occur". Although the valuation of these terms is subject to the judgment of the entity, "probably" within the meaning of US GAAP is generally considered to be a much higher threshold. (that is about 80%) under IFRS (more than 50%). As a result, more contingencies could be accounted for as liabilities under IFRS than under US GAAP.
Think about it for a minute. While we have touted Windstream's (OTCPK: WINMQ) ability to negotiate with UNIT after bankruptcy, there is no bookmaker on the planet that would give Windstream an 80% chance of success. Even if Windstream has managed to negotiate a lower rent payment, taking into account these results, it is quite possible that the rent negotiation will result in a rent low enough for UNIT to default in one year. . UNIT would essentially choose the "scorched earth" option if it were forced to accept payments that would make it an unsustainable UNIT and would guarantee Windstream's bondholders to keep only paper without value. Windstream also comfortably covers the rent with an OIBDA of more than 3X. Therefore, the possibility is so low that a rent reduction would be a lethal blow to UNIT, which we would normally assign to it a probability of zero percent.
But, to defend the devil's advocate, if we associate a 25% probability to the two results, we still have one chance out of sixteen or a probability of less than 7% (0.25 x 0.25) of bankruptcy. UNIT in 12 months. It's quite far from 80% required.
How the language "in activity" really increased the anxiety of the UNIT
The listeners themselves have set up a chain with their work (that's us underlining).
On March 18, 2019, we received a limited waiver from our lenders under our credit agreement, waiving a default event related solely to the receipt of an opinion on the continued operation of our Auditors for our audited financial statements for 2018. The limited waiver was issued as part of the fourth amendment (the "Amendment") to our credit agreement. In the Windstream bankruptcy, or at an earlier date, if certain other conditions are specified, the amendment generally limits our ability under the credit agreement to prepay unsecured debt and pay dividends in the future. cash exceeding 90% of our taxable income of the REIT, determined without any compensation. net of dividends paid and excluding net capital gains. The amendment also increases the interest rate on our term credit facility, which will now bear a LIBOR rate, subject to a floor of 1.0%, plus an applicable margin of 5.0%. , an increase of 200 basis points from our previous rate. This increase will be effective for the remaining term of the facility, which expires on October 24, 2022.
The increase in the interest rate will result in the elimination of $ 42 million of adjusted cash flow from operations.
Source: presentation of the UNIT
The auditors therefore stated that UNIT's risk of non-viability (… wrongly in our opinion) was substantially increased. Oh, the irony!
What to do now?
The cup will obviously send enthusiasts ardent dividends out of society. There are still viable ways to get a good income. We would focus on the links described earlier in our article.
At this point, investors may also be cautious about selling the $ 5 put options for January 2020.
Source: Author's calculations
The yield is really good for what we consider to be a fairly remote bankruptcy risk and has a significant price cushion in front of it.
We were fortunate to stay out of the capital, as we did. We would never have predicted the exact chain of events that occurred as a result of the Aurelius litigation. However, the simple risk has kept us away and our last exchanges on this topic have been on the short side.
Even at this point, as long as the Windstream reorganization is not over, we are not very optimistic about UNIT's prospects. We believe, however, that the risk of bankruptcy for UNIT is low and that the assets are of substantial value. The bonds will probably recover their full value, even if UNIT is outsourced and we continue to play through bonds. Entrepreneurial investors may consider $ 5 put options. For those who are long in common, you have our admiration and potentially our condolences.
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Disclosure: I / we have / we have no position in the actions mentioned, and do not plan to initiate a position within the next 72 hours. 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.
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