A long line of people wrap around the US Bankruptcy Court in New York. (Photographer: David Karp/Bloomberg News)

Windstream's Downfall Revives Debate Over Manufactured Defaults

(Bloomberg) -- Windstream Holdings Inc.’s downfall could bring financial chaos to the rural phone company, enrich Aurelius Capital Management LP by about $310 million and revive debate about whether some debt investors are making money by unfairly disrupting companies, credit markets and consumers.

The provider of telecom services filed for Chapter 11 bankruptcy Monday after losing a court battle with Aurelius, the New York hedge fund, over whether Windstream defaulted on its bonds by spinning off Uniti Group Inc. in 2015. The filing also blurs the status of Uniti, which owns the network that Windstream uses to serve 1.4 million consumers and small businesses in 18 states and counts Windstream as its biggest customer.

There were no formal objections from creditors to the spinoff until 2017, when Aurelius sued and contended that Windstream had defaulted by unfairly stripping bondholders of assets that back up their investment. The verdict from Judge Jesse Furman this month supported Aurelius, and in turn entitled other creditors to demand immediate repayment of company loans and bonds, which total about $5.8 billion.

Debtholders and regulators may see the bankruptcy as further proof that narrow groups of investors are profiting improperly by using novel legal arguments to get defaults declared while simultaneously buying credit derivatives that pay off if a company goes bust. Tony Thomas, chief executive officer of Windstream, raised the issue in the company’s statement.

Swap Market

“Windstream strongly disagrees with Judge Furman’s decision,” Thomas said. “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 partners.”

Thomas said “time is well-past for regulators to carefully examine ramifications of an unregulated credit-default swap marketplace.”

Aurelius said Windstream’s handling of the sale and leaseback with Uniti was responsible for the outcome.

“Windstream’s accusation of market manipulation is nonsense,” Aurelius said in an emailed statement. “Rather than whining about us and Judge Furman, Windstream’s management and board should engage in much-needed introspection. They alone caused the company to enter into a terrible sale-leaseback and prejudice its bondholders by breaking its promises to them.”

‘Unregulated Marketplace’

Windstream said it will continue with business as usual without restructuring its operations, and said Citigroup Inc. promised a $1 billion loan to get it through bankruptcy, according to its statement. The company listed more than $10 billion in assets and liabilities in its bankruptcy petition.

Furman’s decision was the latest victory for Aurelius, led by Mark Brodsky, which was the lone creditor to claim that Windstream defaulted. The hedge fund brought its case long after the 2015 spinoff of Uniti was completed, and other bondholders later agreed to a deal with Windstream designed to help retroactively cure any default caused by the spinoff of Uniti.

Aurelius didn’t sign on to the plan and ultimately prevailed in court, with Furman faulting Windstream’s interpretations. The company’s “financial maneuvers — and many of its arguments here — are too cute by half,” he wrote.

Uniti’s Cloud

Uniti’s future is clouded because the company gets more than two-thirds of its revenue from its former parent, with a master lease giving Windstream the exclusive right to use the Uniti’s telecommunications network. That lease could be in jeopardy because of its sizable expense to Windstream -- more than $650 million a year -- and bankruptcy proceedings often lead to revision or rejection of existing contracts.

Windstream relies on Uniti to serve its customers, and it’s also Uniti’s biggest customer, making a complete cutoff of their relationship less likely. Uniti has said “the validity of our master lease agreement with Windstream was not impacted by the ruling, and access to our network remains critical to Windstream’s operations and its ability to serve its customers.”

The bigger threat, according to S&P Global Ratings, is if Windstream creditors cite the covenant breach to question the validity of Uniti’s 2015 sale and leaseback deal. In that case, the creditors might lay claim to Uniti’s assets, S&P said in a Feb. 21 report.

‘No Pleasure’

In a Feb. 19 statement before the bankruptcy filing, Aurelius said it took “no pleasure” in Windstream’s financial predicament, but that the company could have avoided its present circumstances by settling earlier.

Aurelius’s Brodsky is a distressed debt investor who got his start working for Elliott Management’s Paul Singer. He has taken on the likes of General Motors, Argentina and Puerto Rico in litigation that relies on the Harvard-trained lawyer’s ability to use novel legal theories and target grey areas in the law.

In Argentina, one of Brodsky’s biggest wins, Aurelius drew the ire of an entire nation. The decade-long legal battle got ugly at times, with other holdout creditors going so far as to seize an Argentine naval ship in Ghana to pressure the country into paying what it owed.

The case is Windstream Business Holdings LLC, 19-22310, U.S. Bankruptcy Court in Southern District of New York (White Plains)

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