Windstream at risk after losing the default decision to Aurelius

(Bloomberg) – The fate of Windstream Holdings Inc. was questioned after a court ruled that the rural telephone company defaulted on its bonds in 2015 by selling shares of Uniti Group Inc. Windstream had dropped 43% in prolonged trading.

The ruling made Friday in Manhattan federal court is a win for New York hedge fund, Aurelius Capital Management LP, which says the deal has unfairly stripped bondholders of assets that guarantee their investment. Windstream, which serves approximately 1.4 million consumers and small businesses in 18 US states, warned that a defeat could require it to seek bankruptcy protection or liquidation.

Shares of the company's Windstream business unit have breached the terms of the bonds issued and Aurelius is entitled to a judgment of $ 310 million, Judge Jesse Furman said in his ruling. Windstream, based in Little Rock, Arkansas, said in a statement that he was pursuing various options, including a call.

"We are disappointed and frankly surprised by the decision and will take immediate action to implement all available options, including post-trial motions and an appeal," said Tony Thomas, President and CEO of Windstream, in his communicated.

Uniti and Aurelius representatives did not respond to messages requesting comment. Uniti shares also fell by more than 20% at the end of the session.

Surprise Verdict

The company seeking to appeal, "it is unlikely that any consequences will occur in the very short term," said Matthew Dolgin, an analyst who follows Windstream for Morningstar Inc. "If the verdict has been upheld in all potential calls, we believe that there is a reasonable solution. "Customers will probably not notice any major effects, as the company is more likely to reorganize than liquidate," Dolgin said.

Furman also rejected Windstream's counterclaims against Aurelius, saying that the company's "financial maneuvers – and many of its arguments presented here – were half too cute."

Investors have been waiting for a verdict for months after a trial that was completed in July, with management having assured many times that Windstream was hopeful of a favorable verdict. "We are clearly looking forward to getting it so we can refinance the balance sheet," said CFO Robert Gunderman at an investor conference on Dec. 5.

Stubborn opponent

Aurelius, led by Mark Brodsky and recognized as one of the most stubborn troubled debt investors, has requested an immediate refund of Windstream bonds that she owns. The fund should benefit from notes purchased at a discount, and possibly derivatives, called credit default swaps, which are refundable if a company fails to meet its debt obligations.

This could happen because the default decision could give holders of other Windstream bonds and loans the right to demand an immediate refund, which could leave the company insolvent.

The case began in 2017, when Aurelius alleged a default on Windstream's 6.375% senior notes maturing in 2023. The hedge fund held more than 25% of the relevant notes, with more than $ 310 million in capital and interest.

The dispute focuses on how Windstream handled the transfer of assets to Uniti, including kilometers of copper wire and fiber optic cable. Aurelius and the trustee, the US Bank National Association, stated that the transaction was a sale and leaseback transaction, prohibited by the Note Indenture.

Aurelius will liaise with the other parties and draft a judgment by February 25, in accordance with the judgment.

The case is the American bank c. Windstream Services, 17-cv-07857, US Court, Southern District of New York (Manhattan).

(Adds a Windstream statement beginning in the third paragraph.)

– With the help of Josh Saul and Olga Kharif.

To contact the reporters on this story: Allison McNeely in New York at [email protected] Tiffany Kary in New York at [email protected]

To contact the editors in charge of this story: Rick Green at [email protected] Shannon D. Harrington at [email protected]

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