Aurelius and Windstream's Game of Debt Chess Heads to Court

(Bloomberg) -- Aurelius Capital Management’s single-handed attempt to drag Windstream Holdings Inc. kicking and screaming into default makes a stop today in Manhattan, where a judge will consider the kinds of tactics both companies and hedge funds can wield in a restructuring.

New York-based Aurelius and the rural telecommunications company have been locked in a dispute over whether Windstream has in fact defaulted on its debt. A timeline shows the complexity of this high-stakes chess battle, which is playing out move by move both in court and in the marketplace. It’s there that Windstream recently made its latest -- and what it hopes will be decisive -- move, inducing a majority of its bondholders to agree to waive default claims through a $1.6 billion debt exchange.

Aurelius and Windstream’s Many Moves and Countermoves: Timeline

A Manhattan federal court judge will today weigh Windstream’s argument that the case should be dismissed after a hearing in January against Aurelius’s proposal that the debt exchange be investigated leading up to a full-blown trial in May. As the hearing approaches, credit and restructuring experts say the closely watched drama will set precedents for whether defaults can be manufactured -- as Windstream argues is the case here -- in a slow restructuring market.

"Aurelius is definitely trying to manufacture a default," said Stephen Hazelton, founder of Street Diligence, a research firm that analyzes credit agreements. "The question is whether or not their argument is valid."

Representatives for Windstream and Aurelius declined to comment. Aurelius denied in court filings that there is anything manufactured about its claims.

2015 Spinoff

At the core of the debate is the question of whether Windstream actually defaulted on its debt. Aurelius says it did, through a 2015 spinoff and leaseback of assets in Uniti Group. But Little Rock, Arkansas-based Windstream says the hedge fund is just creating the claim years after the alleged trigger to try and tip it into bankruptcy and benefit its own credit-default-swap position. It has dubbed Aurelius a "rogue noteholder," claiming that not a single other bondholder has joined the hedge fund’s bid.

U.S. Bank, a trustee that holds the same notes as Aurelius, took its side in a lawsuit that said the Uniti transaction violated an indenture meant to preserve assets for noteholders.

The most significant development in the debate so far has been the completion of Windstream’s debt exchange, which it says makes Aurelius’s claims irrelevant. It has already cost the company, which paid $2.50 for every $1,000 in bonds to waive any default claims, $2.25 million to try and mitigate its risk.

Yet Aurelius has continued with its assertions, sending a notice to accelerate the debt even after the exchange was completed. The market, at least in credit-default swaps, reacted.

Aurelius and Windstream's Game of Debt Chess Heads to Court

Aurelius has a formidable reputation in distressed debt, and is known for fighting prolonged battles over arcane legal issues. It was recently dealt a setback in a dispute over the restructuring of Brazilian telecom firm Oi SA, and has a central position in the fight over Puerto Rico’s debt. Kristin Going, a partner in the bankruptcy practice of law firm Drinker Biddle, said she believes this is a rare instance where a company has successfully diluted a hedge fund of this stature through an exchange offer.

"You have a classic aggressive hedge fund who may or may not be checkmated by an issuer," Going said. "I don’t know of any other situation like this. And ... its Aurelius."

Windstream has accused Aurelius of "gamesmanship," citing, for example, the hedge fund’s move to rescind a Nov. 27 default notice, completely changing the legal dispute, just 90 minutes before both sides were due to file letters with the court. A public notice of acceleration sent Dec. 7 also "sought to baselessly roil" Windstream since the issue at stake -- default -- was already being litigated, the company said.

‘Ulterior Motives’

Aurelius’s argument is that the new notes issued in the exchange aren’t valid because an indenture prohibited the new debt. It calls the waivers "purported," and sticks by it’s initial claim that the default related to Uniti is still an issue.

“We believe that it will be difficult for Aurelius to convince the judge that there has been a default," Tom Claps, a litigation analyst at Susquehanna International Group LLP, wrote in an instant message. He said that it was a parent company, not the Windstream Services unit restricted by the indenture, that leased the Uniti assets at issue in Aurelius’s claims. And “because of Aurelius’ ulterior motives (i.e., CDS position), we believe the judge will more closely scrutinize Aurelius’ claims at trial,” Claps wrote.

According to the U.S. Bank complaint, the Uniti deal involved subsidiaries that were restricted by the indenture.

‘Stronger’ Argument

Windstream "has a far stronger legal argument" than Aurelius for several reasons, according to Covenant Review. The Uniti transaction doesn’t appear to have breached covenants to begin with, the independent credit research firm said in a Dec. 8 note.

Yet even if Windstream triumphs against Aurelius in court, it may not be the end of this restructuring saga. The company’s bid to fend off Aurelius hasn’t exactly made it healthier economically, Drinker Biddle’s Going said, adding: "I don’t think they go off happily ever after."

The case is U.S. Bank v. Windstream Services, 17-cv-07857, U.S. District Court, Southern District of New York (Manhattan).

©2017 Bloomberg L.P.

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