Windstream Asks Investors for a Second Chance After Bankruptcy

(Bloomberg) -- Windstream Holdings Inc. is looking for $2 billion to exit bankruptcy as it tries to end an era marked by declining business and a controversial spinoff that ultimately led to its restructuring.

The telecommunications company aims to complete its Chapter 11 case by late August, and plans to keep Chief Executive Officer Tony Thomas and Chief Financial Officer Bob Gunderman at the helm.

Investors have already submitted enough orders to cover the roughly $1.65 billion of first-lien debt at a yield in the low 8% range, according to a person with knowledge of the matter who asked not to be identified discussing confidential information. JPMorgan Chase & Co. has been gauging interest for the financing over the past few days, and a deal may emerge as soon as next week.

With the backing of distressed-debt heavyweights Elliott Management Corp. and Oaktree Capital Management, Windstream is essentially asking investors to give a second chance to the team that led the company through a controversial 2015 spinoff of Uniti Group Inc. that left it saddled with about $6.5 billion of debt and ultimately drove it into bankruptcy. It’s trying to chart a brighter future pegged to growing demand for broadband internet services in rural areas.

Representatives for JPMorgan and Windstream declined to comment.

Family Ties

The first-lien debt may be split equally between loans and bonds, though that could change, according to people familiar with the matter. The financing, in its preliminary structure, also includes about $500 million of junior debt, the people said.

Thomas, who has served as Windstream’s CEO since 2014, was in charge when the Little Rock, Arkansas-based company spun its network assets into the separate Uniti entity, which happens to be led by Kenny Gunderman, the brother of Windstream’s CFO.

The idea was to generate cash to pay down debt and support its struggling business. The Uniti deal was probably beneficial to some shareholders because equity was transferred from Windstream into Uniti at the time of the spinoff, according to Phil Brendel, a Bloomberg Intelligence analyst covering distressed debt.

But the transaction came back to haunt the company only a few years later when New York-based hedge fund Aurelius Capital Management said the spinoff violated Windstream’s debt covenants. A federal judge sided with Aurelius in February 2019, and the company filed for bankruptcy less than two weeks later.

“The strategic mistakes they made were pretty apparent,” said Brendel.

A representative for Aurelius declined to comment. A spokesperson for Uniti didn’t respond to a request for comment.

The company’s restructuring largely hinged on its ability to renegotiate a $650 million annual lease with Uniti for access to key network assets, while planning for ambitious capital expenditures to transition its network to newer technology. The company claimed in bankruptcy that the lease it helped create was fraudulent, while Uniti threatened to kick Windstream off the network.

After months of court-supervised mediation, the two sides reached a settlement, and the terms were approved by the bankruptcy court in May. Under Windstream’s court-approved bankruptcy plan, its unsecured and second-lien creditors will effectively get zero recovery, and its first-lien creditors will get about 60 cents back for every dollar they lent.

Rural Focus

Windstream still faces the existential question of what it will do to grow its subscriber base over the long term. It plans to continue focusing on rural broadband internet and enterprise services, the company said.

While its reorganization shaves off more than $4 billion of debt, Windstream will still owe about $2 billion, according to a lender presentation seen by Bloomberg. Annual revenue is expected to stabilize at around $4.2 billion annually through 2026, according to materials released in February, down from about $5.5 billion in 2018.

“Windstream’s rapid deterioration in bankruptcy ended up being the driving force behind its master lease settlement with Uniti,” Brendel said in a June note. “We suspect it was Windstream’s declining ability to pay its lease that compelled Uniti to make significant concessions, rather than Windstream’s specious re-characterization claims.”

To be sure, Windstream has reported steady operating income for its rural broadband internet service in recent quarters, largely from cost-cutting. The company added 22,000 subscribers to its broadband service in the second quarter, its highest increase in over a decade. But it needs to keep upgrading networks to ensure that demand keeps growing.

The company is attempting a fresh start by appointing a new board of directors, which includes Elliott and Oaktree. Both firms are taking substantial stakes in new equity that will turn Windstream into a private company. Representatives for Elliott and Oaktree declined to comment.

Windstream also reached a new five-year employment agreement with Thomas, effective on its emergence from bankruptcy, according to a court filing. The CEO will have a base salary of $1 million, with a short-term potential bonus of as much as 125% of the salary.

But Bloomberg’s Brendel is still skeptical about the long-term trajectory of the business, given the time-consuming and expensive bankruptcy and Uniti transaction -- neither of which were particularly good to creditors, he said.

“This whole bankruptcy looks like a band-aid for Windstream and Uniti, as opposed to a real standalone enterprise,” Brendel said.

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