Citadel-Led Creditor Group Agrees to Windstream Debt Swap

(Bloomberg) -- A group of Windstream Holdings Inc. creditors have agreed to exchange $300 million of the company’s bonds for new debt, a step that may help the rural phone company fend off a default claim and tame its $6 billion debt load.

The money managers are led by Citadel and own around 60 percent of Windstream’s 7.75 percent notes due in 2020, according to people with knowledge of the matter. The investors, who also include Elliott Management, Western Asset Management Co., and Loomis Sayles, agreed to exchange their bonds for 10.5 percent second-lien notes that mature in 2024, said the people, who asked not to be identified because the matter is private.

The noteholders, advised by Milbank, Tweed, Hadley & McCloy, are in discussions with other investors that could expand their holdings to 80 percent of the debt, the people said. While that would still fall short of the 90 percent threshold the company set in its exchange offer, Windstream could continue to extend the offer or lower the threshold. The offer expires at the end of the day Thursday.

Representatives for the firms and Windstream declined to comment.

Reducing Debt

Windstream has said that completing the debt exchange -- which is also open to longer- dated debt due between 2021 and 2024 -- will help it ease its debt burden. That would allow management to focus more on efforts to turn around the business, according to Lindsay Gibbons, a senior analyst at CreditSights.

A successful exchange may bolster Windstream’s position in an ongoing legal battle with a separate bondholder, hedge fund Aurelius Capital Management. The fund alleges Windstream defaulted on bonds due in 2023 when it spun-off Uniti Group Inc. in 2015. The parties are in the middle of a trial that could force Windstream to file for bankruptcy if the company loses.

Aurelius owns and has been buying Windstream’s notes, as well as credit-default swaps that would pay off if the company defaults, according to testimony at the trial from an adviser to the company. If the judge sides with Aurelius and its trustee U.S. Bank N.A., the decision could trigger cross-defaults on an estimated $5.7 billion in debt, and Windstream doesn’t have the cash to repay. A representative for Aurelius declined to comment.

But the company’s improved financial health after the exchange could weigh on Judge Jesse Furman’s ruling in the case, Gibbons said. The trial is adjourned until July 31.

“A successful exchange would be another example of support from bondholders, which has been raised in the trial,” said Gibbons, who covers the TMT sector. “We don’t know whether that will resonate with the judge, but it shows how investors believe in the company and want to remain invested. That contradicts Aurelius’ desire to push the company into default.”

Complicating Appeal?

If Windstream loses the trial and files for bankruptcy, creditors who accepted the new bonds would be in a better spot than they would be if they held onto unsecured debt. Assuming Aurelius doesn’t participate, its unsecured securities would only be repaid after secured debt, which, once the exchange is completed, will include holders of much as $1.5 billion of new second-lien bonds.

But if Aurelius were to lose the trial and decide to appeal, the exchange could make an appeal process more complicated because there would be two debt swaps that would ultimately have to be unwound, CreditSights’ Gibbons said. Windstream completed a debt exchange in November 2017 that has become a focus in its default trial.

“It comes down to a question of how much this impacts the judge’s ruling,” she said. “Perhaps it does, or perhaps he focuses solely on the letter of the contract and the form of the indenture, but ultimately a successful exchange improves the overall environment for Windstream.”

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