For most of us in Arkansas, August means the end of summer, the first day of the new school year, and the beginning of football season. But for one major employer here in Little Rock, August has brought with it a much more stressful waiting game.
Employees at Windstream Holdings will learn in a matter of weeks whether a predatory hedge fund will win a legal battle that could force the company into bankruptcy. As mayor of Little Rock, I spend much of my time working on economic development. It greatly concerns me that one of our corporate citizens is being unfairly targeted in this way.
Windstream provides Internet and phone access for people in rural communities in Arkansas and 17 other states. The company employs approximately 13,000 people around the country, with more than 1,100 of those jobs right here in Arkansas and around 800 in Little Rock alone.
Windstream's books are in good shape. Were it not for the efforts of a hedge fund called Aurelius Capital, the company would be in no danger of having to file for bankruptcy. Yet today, Windstream faces a potentially life-or-death court verdict because this hedge fund made huge bets that the company would fail and is now suing the company to get paid off on those bets.
Aurelius filed suit in the Southern District of New York, asking U.S. District Judge Jesse Furman to declare Windstream in default on its bonds. The hedge fund alleges that Windstream's decision to spin off some of its real estate assets two years ago violated an agreement it made with its bondholders.
Yet none of Windstream's other bondholders seem to agree, and none of them objected to the spinoff at the time. What's more, after Aurelius suddenly emerged last year with its baseless lawsuit, Windstream's other bondholders agreed to waive the alleged default, we hope leaving the hedge fund without much of a legal leg to stand on.
But Aurelius is not giving up, because they need Windstream to go bankrupt to get their payday.
To place their bets that Windstream would fail, Aurelius used controversial financial instruments called credit default swaps. If credit default swaps sound familiar, that's because their abuse was at the heart of the 2008 financial crisis: Big banks used credit default swaps to bet on the housing market, then asked taxpayers to bail them out when they couldn't cover their losses.
A decision that favors Aurelius would tell hedge funds it is open season for using credit default swaps to win big by forcing good companies into bankruptcy, with employees, retirees, and the general public nothing more than collateral damage.
Fortunately, I hope, the hedge fund is unlikely to prevail. Multiple respected legal analysts have noted that Aurelius' arguments are weak, with one predicting that "it will be difficult for Aurelius to convince the judge that there has been a default." Another noted that Windstream "has a far stronger legal argument." A third concluded, "We can safely say that Windstream did not breach its covenants."
Let's hope these analysts are right.
Even if Judge Furman agrees and decides in favor of Windstream, reforms are needed to ensure that this can't happen again. If a hedge fund suing a company has more to gain from that company's failure than from its success, then the company should be entitled to that information.
More transparency would deter this behavior, because judges would know up front whether a hedge fund plaintiff was acting in good faith or just trying to force a company into bankruptcy to score a big windfall.
In 2010, Windstream decided to make Little Rock its permanent headquarters. It was a great day for our city, adding 210 new jobs to the thousands of others that have been created here over the past 10 years.
Here in Little Rock, we're proud of the community we've built. We stand up for our own when they need our help, and that's why we're standing with Windstream in this fight. The last thing we need is a predatory New York hedge fund trying to make a buck at our expense.
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Mark Stodola is the mayor of Little Rock and president of the National League of Cities.
Editorial on 08/03/2018