The Windstream Plunge, Explained

Windstream Holdings Inc WIN could be exposed to the risk of bankruptcy following a court ruling that deemed the telecommunications services provider to have defaulted on its bonds.

What Happened

The U.S. District Court of the Southern District of New York ruled in favor of Aurelius, a hedge fund owning a large position in certain notes — primarily senior unsecured notes due in 2023 that were issued by Windstream.

In a lawsuit filed by U.S. Bank National Association in October 2017 on behalf of Aurelius, the latter alleged that Windstream breached a covenant in the governing bond indenture that restricts sale and leaseback transactions.

Windstream spun off its copper and fiber assets subsidiary in 2015, with the subsidiary later renaming itself as Uniti Group Inc UNIT. Unit was organized as a REIT for tax purposes. 

Windstream sold significant telecom assets it owned to Uniti in exchange for stock in Uniti; $1.035 billion in cash; and $2.5 billion in debt, then leased back assets from Uniti.

This sale and leaseback arrangement violated the indenture related to at least its senior notes due 2023, culminating in a default on Dec. 7, 2017.

The court ruled that Aurelius is entitled to receive $310.46 million in damages, with an additional $61,347.50 per day in interest after July 23, 2018.

In response to the court verdict, Windstream said it will appeal the decision.

"We are disappointed in, and frankly surprised by, the ruling and will be taking immediate steps to pursue all available options, including post-trial motions and an appeal," said CEO Tony Thomas.

What's Next

The court decision may set a precedent, as it is expected that other bondholders may also bring lawsuits against Windstream. An inability to pay bondholders could force Windstream to file for bankruptcy.

Since the company has decided to appeal, the resolution could take years.

What's Next

Following the negative verdict, Windstream announced Tuesday its decision to postpone the release of its quarterly results, originally scheduled for Feb. 21. The company now expects to release its earnings report no later than March 18.

"Aurelius shall confer with the other parties and draft a proposed judgment consistent with the foregoing, and shall file it on ECF for the Court's approval no later than Feb. 25, 2019," according to Friday's court ruling.

Windstream shares were plunging 61.28 percent to $1.30 at the time of publication Tuesday. 

Uniti, which derives about two-thirds of its revenue from Windstream, was falling 37.59 percent to $12.47. 

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