Windstream Holdings Inc. filed for Chapter 11 bankruptcy reorganization Monday, only 10 days after losing a critical ruling in federal court in New York.
The move by the Little Rock-based rural telecommunications company to seek protection from its creditors comes after a Feb. 15 ruling by U.S. District Judge Jesse Furman, who said Windstream defaulted on some of its bonds in 2015 when it spun off real estate investment trust Uniti Group Inc.
Actions by Windstream subsidiary Windstream Services amounted to a breach of its financial covenants, making Aurelius Capital Management, a New York hedge fund, entitled to a $310 million judgment, Furman said. Windstream has lined up a commitment for $1 billion of financing from Citigroup Inc. to get it through bankruptcy, Bloomberg News reported.
Windstream shares closed at 45 cents Monday, a 52-week low, in trading on the Nasdaq exchange. More than 13.5 million shares traded, 10 times its average trading volume.
Shares of Uniti Group closed at $10.60, up 15 percent, in trading on the Nasdaq exchange. More than 27.7 million shares were traded, almost eight times its average volume.
Windstream has about 1.4 million customers, including small businesses, in 18 states, and it has about 13,000 employees.
The company listed more than $10 billion in assets and liabilities in its filing in bankruptcy court in the Southern District of New York.
In 2015, after approval from federal and state regulators, Windstream completed the spinoff of what is now Uniti Group. Windstream Services, a Windstream Holdings subsidiary, sold the Windstream assets to Uniti. Windstream Holdings leased the assets back from Uniti.
More than two years later, Aurelius Capital Management invested more than $300 million in one of Windstream's corporate bond issues.
The battle highlights a growing practice among hedge funds of searching for instances in which a company has violated bond covenants even though the issuer is healthy enough to continue to service and refinance its debt, The Wall Street Journal reported.
"Aurelius for a long time has been taking on these litigation plays," Lance Vitanza, a high-yield debt analyst at Cowen & Co., told the Journal. "That's where they're buying a specific bond because they believe the company has violated one of the terms on which the debt was issued."
On Friday, Moody's lowered its rating on both Windstream and Uniti bonds. Moody's cut Windstream's corporate family rating to Caa3 and Uniti's to Caa2.
Windstream had warned that an unfavorable ruling in federal court could lead to bankruptcy or liquidation. The default ruling entitles other creditors to demand immediate repayment on debts they hold.
"Following a comprehensive review of our options, including an appeal, the board of directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact of Judge Furman's decision and the impact it would have on consumers and businesses across the states in which we operate," Tony Thomas, Windstream's chief executive officer, said in a statement.
"Taking this proactive step will ensure that Windstream has access to the capital and resources we need to continue building on Windstream's strong operational momentum while we engage in constructive discussions with our creditors regarding the terms of a consensual plan of reorganization," Thomas said.
Windstream's management acted decisively to secure the long-term financial stability of the company, Thomas said.
"We are confident that, upon completion of the reorganization process, we will be even better positioned to invest in our business, expand our speed and capabilities for our customers and compete for the long term," Thomas said.
Thomas said the company would, with court approval, "continue paying our employees, maintaining our relationships with our vendors and business partners and serving our customers as usual."
In a filing Friday with the Securities and Exchange Commission, Windstream extended Thomas' contract through 2024.
The verdict was a victory for the New York hedge fund Aurelius, led by Mark Brodsky. Windstream, legal experts and stock analysts had been confident that Furman would decide in Windstream's favor. Thomas was often quoted after the summer trial last year as saying that Windstream expected to prevail.
"There's no uncertainty here in my mind in terms of the outcome. ... Obviously, we are going to win," he said in September at an investors conference.
But Furman's ruling surprised Windstream.
"The outcome is an unequivocal surprise to many in the equity investor community," said Gregory Williams, an analyst with New York-based Cowen & Co. "We believe legal experts and the Street pegged a favorable ruling [for Windstream] at 70 to 80 percent.
"Despite the fact that the 2015 Uniti spin-off structure was (1) approved by bondholders, stockholders, both boards and management, and third party due diligence, and (2) that Aurelius accumulated bonds two years after the spinoff to monetize on an alleged technicality, the judge ruled by the strict letter of the law deeming the Uniti spin-off as a sale-leaseback, judging Windstream's maneuverings as 'too cute by half,' and that Windstream did not act in good faith," Williams said.
Business on 02/26/2019