On 1 November, telecom provider Windstream Holdings, Inc. again announced amended terms for the consent solicitations and exchange offers for the existing senior unsecured notes of its subsidiary Windstream Services, Inc. The consent solicitations and exchange offers seek to address a default notice under the company’s existing 6.375% senior notes due 2023, which was delivered 22 September by Aurelius Capital Management and alleges the company violated the notes’ Sale-Leaseback covenant in connection with its April 2015 spinoff of certain telecommunications network assets and other real estate into Uniti Group Inc., an independent, publicly traded REIT. As we continue to assess the myriad of potential issues with that transaction, in this report, the Debtwire legal analyst team discusses Windstream’s capacity to incur the proposed refinancing debt. As explained below, based on our analysis, there exists sufficient capacity to incur that debt.
Per a 1 November announcement, Windstream expects to incur USD 554m of add-on 6.375% senior notes due 2023 in exchange for existing senior unsecured notes and up to USD 450m of new 8.625% senior secured notes due 2025. USD 250m of the secured notes is expected to refinance revolver borrowings, and USD 200m is offered in exchange for existing senior unsecured notes. Windstream expects to obtain sufficient support to complete the exchanges, and the company will therefore be required to locate capacity under the Debt and Lien covenants of its existing indentures and credit agreement to incur the refinancing debt.
Aurelius circulated another letter on 1 November, which claims that the consent solicitation for the 6.375% notes violates those notes’ Payment for Consents covenant and that the April 2015 spinoff resulted in a large amount of Attributable Debt. Those assertions could potentially block the exchanges discussed in this report. In this report, we do not discuss the Payment for Consents issue but do discuss the Attributable Debt issue, which is intertwined with debt capacity. Stay tuned for further analysis on these newly raised issues.
Sources and uses and capital structure are estimated by Debtwire to be as follows, pro forma for the exchanges, as announced 1 November:
The existing notes permit the refinancing debt
Relevant Debt covenant carveouts under each series of unsecured notes are similar and include the following:
- a Ratio Debt basket, subject to a 4.50x leverage ratio test (gross, not net);
- a Credit Facilities basket for notes or loans, which is USD 4bn under the 6.375% notes and USD 2.8bn under the other four series of notes;
- a USD 250m General Debt basket; and
- a Permitted Refinancing Debt carveout. 
Debt Capacity to Incur the Add-On 6.375% Notes: We believe that the USD 554m of add-on 6.375% notes can be incurred under the existing notes as Ratio Debt.
All the existing notes’ Debt covenants contain a Ratio Debt basket subject to a pro forma 4.50x leverage ratio test, and company-reported leverage under the credit facilities was 4.08x at 30 June 2017. Using that figure as a rough proxy for leverage under the existing notes, and because the proposed transactions are not expected to add a significant amount of additional leverage, the company is expected to satisfy the Ratio Debt basket’s 4.50x leverage ratio test on a pro forma basis, absent significant deterioration in LTM adjusted EBITDA. Therefore, we believe all the existing notes allow the company to incur the add-on 6.375% notes as Ratio Debt.
This will not be the case, however, if Aurelius is correct in its assertion that the April 2015 transactions constituted a Sale/Leaseback Transaction under the 6.375% notes. That would mean that those transactions resulted in Attributable Debt, which amount would be included in calculating Windstream’s leverage ratio and would be calculated as the present value of remaining net rental payments under the master lease between Uniti and Windstream Holdings. Per Uniti disclosures, that amount was approximately USD 8.6bn as of 4 October. Obviously, this would explode the covenants, but the Attributable Debt issue can largely be disregarded, because its validity is predicated on a finding of a Sale/Leaseback Transaction, which itself would explode the covenants.
Assuming there exists insufficient Ratio Debt capacity, all the existing unsecured notes contain a Debt covenant carveout for “Permitted Refinancing Debt,” which permit Windstream to refinance its existing unsecured notes in an exchange for unsecured notes, subject to certain requirements. Regarding premiums, the Permitted Refinancing Debt carveouts only permit the principal amount of the refinancing debt to exceed the principal amount of the refinanced debt by “all accrued and unpaid interest thereon and the amount of any reasonably determined premium necessary to accomplish such refinancing and such reasonable expenses incurred in connection therewith.”
The exchange premiums Windstream is offering to exchanging noteholders range from 7.5% to 10.0%, and, if there is insufficient Ratio Debt capacity to incur the add-on 6.375% notes (and no additional capacity under other carveouts), there could be a question as to whether those premiums have been “reasonably determined” and whether the premiums are “necessary to accomplish” the exchanges.
Debt & Lien Capacity to Incur the New 8.625% Secured Notes: In addition to the add-on 6.375% notes, the exchange offers contemplate issuing up to USD 450m of new 8.625% secured notes, of which USD 250m is expected to refinance revolver borrowings and USD 200m is expected to refinance existing unsecured notes. That incurrence of secured debt must comply with the existing notes’ Debt and Lien covenants, and we believe those covenants contain sufficient capacity.
Debt Capacity: Similar to the incurrence of the add-on 6.375% notes, the USD 450m of new 8.625% secured notes could likely be incurred under the Debt covenants’ 4.50x Ratio Debt baskets. To the extent that those new secured notes could not be incurred as Ratio Debt, those secured notes would need to be incurred under the Credit Facilities or General Debt baskets.
In estimating capacity under the Credit Facilities baskets, we assume the USD 250m of new 8.625% secured notes that are expected to refinance revolver borrowings will be incurred under the Credit Facilities baskets and refinance revolver borrowings that are presently classified under the Credit Facilities baskets. But an additional USD 200m of debt capacity needs to be located for the new 8.625% secured notes that are being offered to be exchanged for existing notes.
We estimate that, as of 30 June, the USD 250m General Debt baskets were fully unused and the Credit Facilities baskets contained at least USD 327m of additional capacity, as limited by the more restrictive 7.5% notes due 2022.  Therefore, we believe the Debt covenants contain sufficient capacity to incur the USD 200m of new 8.625% secured notes.
Lien Capacity: In addition to the Debt covenants, the incurrence of liens securing the proposed USD 450m of new 8.625% secured notes must comply with the existing notes’ Lien covenants. Relevant Permitted Lien carveouts under each series of unsecured notes include the following:
- a USD 150m General lien basket; and
- a General lien basket, to the greater of (a) 2.50x LTM adjusted EBITDA less the USD 100m of existing 6.75% Midwest notes due 2028 and (b) capacity under the following baskets: the USD 2.8/4.0bn Credit Facilities debt basket, the USD 250m General debt basket, and a Capital Lease debt basket to the greater of USD 250m and 3% of total assets (USD ~381.2m at 30 June). 
We estimate that as of 30 June these Permitted Lien carveouts contained additional capacity of at least USD 1.7bn and therefore contain more than enough capacity to incur the USD 450m of new 8.625% secured notes (setting aside the Attributable Debt issue).
The existing credit facilities permit the refinancing debt
The credit facilities contain the following relevant Debt and Lien carveouts:
- a carveout for secured Pari Passu Debt, subject to a pro forma 2.25x Secured Leverage Ratio test (gross);
- a USD 150m General debt basket, which can be paired with a USD 150m General lien carveout;
- a carveout for unsecured Permitted Additional Debt, provided no Event of Default and subject to pro forma compliance with the financial covenants; and
- a Permitted Refinancing Debt carveout.
Debt Capacity to Incur the Add-On 6.375% Notes: We believe that the USD 554m of add-on 6.375% notes are permitted under the credit facilities’ Permitted Additional Debt carveout and the Permitted Refinancing Debt carveout would not need to be used.
The credit facilities’ Permitted Refinancing Debt carveout contains the same language as the existing notes (discussed above) and limits principal-increasing premiums to those that are “reasonably determined [and] necessary to accomplish such refinancing.” Therefore, the incurrence of the USD 554m of add-on 6.375% notes is potentially subject to litigation risk if the company cannot locate a carveout to the Debt covenant besides the Permitted Refinancing Debt carveout. However, like the indentures, the credit agreement contains a Ratio Debt basket subject to a 4.50x leverage ratio test, and it is therefore not necessary to rely on the Permitted Refinancing Debt carveout to incur the add-on 6.375% notes.
The carveout for Permitted Additional Debt permits the company to incur unsecured debt provided no Event of Default has occurred and is continuing or would result therefrom and the company is in pro forma compliance with the agreement’s financial covenants, which include a 2.75x Interest Coverage covenant and a 4.50x Leverage covenant. Per disclosures, at 30 June, the interest coverage ratio was 3.86x and the leverage ratio was 4.08x. Therefore, we believe the credit facilities permit the company to incur the add-on 6.375% notes (setting aside the Attributable Debt issue).
The Permitted Additional Debt carveout’s no-EoD requirement would not presently prevent use of that carveout, because the default under the existing 6.375% notes does not constitute an EoD under the credit agreement. (But, of course, an EoD under the 6.375% notes would trigger an EoD under the credit agreement, though consummation of the exchanges is expected to prevent that from happening.)
Debt & Lien Capacity to Incur the New 8.625% Secured Notes: Carveouts relevant to incurring the USD 450m of new 8.625% secured notes include the USD 150m General baskets and the Pari Passu Debt carveout. We believe the secured notes are permitted to be incurred under those baskets because the General baskets are unused and the Pari Passu Debt carveout contains an estimated USD 292.7m of capacity.
As of 30 June, the Pari Passu Debt carveout permitted an estimated USD 292.7m of additional debt, based on estimated secured debt (incl. capital leases) of USD 2,831.8m and company-reported LTM adjusted EBITDA of USD 1,388.7m. The incurrence of the USD 250m of new 8.625% secured notes that refinances revolver borrowings would not eat into that USD 292.7m of capacity, because the test for Pari Passu Debt is leverage-based and the revolver prepayment would offset the debt incurrence. Therefore, we believe there exists sufficient Pari Passu Debt capacity to incur the new 8.625% secured notes, provided earnings do not significantly deteriorate, plus another USD 150m of capacity under the General baskets.
But it may not be over yet
Windstream has received majority consents from its 7.75% senior notes due 2020 and 7.5% senior notes due 2023 and, pro forma for the exchanges, expects to receive majority consents from its defaulting 6.375% notes due 2022 (after Aurelius is diluted). However, even with the above debt refinancings, the risk will still loom that a similar default could be declared under the notes that have not yet provided majority consents, the 7.75% notes due 2021 and 7.5% notes due 2022. Windstream has extended the expiration date of the consent solicitations for those series to 14 November, and, should the company fail to obtain sufficient consents, it will need to reevaluate how to prevent a similar default from being declared under those series. As of the most recent disclosure, Windstream had obtained commitments to tender from 26% of the 7.75% notes due 2021 and 38% of the 7.5% notes due 2022.
Moreover, consummation of the exchanges is not a sure thing. Aurelius’ letter distributed 1 November claims that the consent solicitation for the 6.375% notes violates those notes’ Payment for Consents covenant. Those allegations give Aurelius further ammunition to potentially block the exchanges discussed in this report, as we will address in our continuing analysis of this contentious situation.
by Joseph Henry
Joseph (“Jody”) Henry is a member of Debtwire’s legal analyst team. Jody previously worked as an associate analyst at research firm Covenant Review and joined Acuris in 2015, where his coverage has focused on LBOs, refinancings, and out-of-court restructurings.
Any opinion, analysis, or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice, and subscribers should consult with their own legal counsel for matters requiring legal advice.
 Note that the USD 4bn Credit Facilities basket under the indenture for the 7.75% notes due 2021 and issued 26 August 2013 is no longer effective. Pursuant to those notes’ registration rights agreement, those notes were exchanged in 4Q13 for add-on 7.75% notes due 2021 issued under the 28 March 2011 indenture, which contains a USD 2.8bn Credit Facilities basket.
 We estimate usage of the Credit Facilities baskets based on the amount of credit facilities debt outstanding on the issue date of each series of notes, which we estimated using the greater of the credit facilities debt outstanding at the beginning and end of the quarter in which each series of notes was incurred. Under those assumptions, the Credit Facilities basket of the 7.5% notes due 2022 is the most restrictive of the existing notes and contains an estimated USD 327m of additional capacity.
 Our summary of the General lien basket is simplified. The actual carveout reads: “Liens securing obligations in an amount when created or Incurred, together with the amount of all other obligations secured by a Lien under this clause (1) at that time outstanding (and any Permitted Refinancing Indebtedness Incurred in respect thereof) and (in the case of clause (B) only) any Liens securing obligations in respect of the 6.75% Notes due 2028 of Windstream Holding of the Midwest, Inc., not to exceed the greater of (A) the sum of (i) the amount of Indebtedness Incurred and outstanding at such time under Section 4.09(b)(i) [the Credit Facilities debt basket], (iv) [the Capital Lease debt basket] and (xv) [the General debt basket] plus (ii) the amount of Indebtedness available for Incurrence at such time under Section 4.09(b)(i), (iv) and (xv) and (B) the product of (x) 2.50 and (y) the Company’s Consolidated Cash Flow for the most recent four fiscal quarters for which internal financial statements are available at such time, which Consolidated Cash Flow shall be calculated on a pro forma basis in the manner set out in clause (a) of the definition of “Consolidated Leverage Ratio.”