The second firm came to the same conclusion as Skadden, which also advised the company at the time of the 2015 deal, the sources continued. Windstream management has been wary that litigious hedge fund Aurelius Capital is behind a theory that the company breached the bond indenture’s asset sale covenant during the spinoff.
Aurelius’ recent track record of putting on trades to profit from calling out management on allegations of breaching covenants during past transactions runs through Intelsat, to Nextel and Energy Future Holdings’ merchant subsidiary TCEH.
Windstream management has not been shy about its ability to play defense. Company executives at the recent Goldman Sachs’s 26th Annual Communacopia Conference on 13 September told attendees that the company is comfortable with the transaction’s terms, said a buysider and the sources familiar.
Still, market participants expect Aurelius to take concrete action in the form of a letter to the company, but that move hasn’t materialized yet, said a buysider and a holder. “We’ll see if [the company actually gets] under attack,” said the buysider. “Let’s wait for the punch. There is a ghost in the closet and no one has the key to let it out for now.”
Windstream announced the Uniti transaction back in July 2014 in an effort to spin off its copper assets and a portion of its fiber network and other fixed real estate assets into a tax-efficient real estate investment trust (REIT). The company entered into an agreement to lease back those assets for USD 650m a year. The transaction — which was aimed at lowering Windstream’s debt by roughly USD 3.2bn while also increasing free cash flow — is actually putting more pressure on the company through swelling fixed rent costs at a time when earnings are in a downward trend.
Besides the financial tool, legal questions spread in the market as to Windstream may have breached the asset sale covenant under its indentures when it transferred its 19.6% interest in Uniti to bank creditors in exchange for the retirement of USD 672m under the revolver. A report published by Xtract Research today concludes that the asset sale covenant clearly permits Windstream to repay the revolver with asset sale proceeds.
“This is not controversial and this is exactly what occurred,” wrote Xtract. “[The covenant breach] is a weak argument and the covenant analysts at Xtract Research are surprised that it has garnered so much attention. To be clear, we assume that Windstream had restricted payment capacity for the initial spinoff and focus on the subsequent sale of the 19.6% interest they retained. Based on the Windstream disclosures and our review of the asset sale covenants in the bond indentures, we can safely say that Windstream did not breach its covenants.”
Some market participants are also surprised by the timing of the covenant breach allegations given that the transaction closed more than two-and-a-half years ago. By comparison, when Aurelius sent several letters to satellite services provider Intelsat challenging the validity of guarantees granted by the company to the 6.625% noteholders it was just six months after the transaction was completed. On the other hand, Aurelius’ stab at beleaguered telecom company NII Holdings in 2014 over transfers of equity interests in subsidiaries came well after the fact, as the dealing occurred in 2009.
“In Intelsat’s case, there was an intercompany transaction and Aurelius sent the letter six months afterwards,” said a trading desk analyst. “In NII it was clearer what they wanted to do but here [Windstream] it’s hard to understand.”
Windstream, along with its peer Frontier Communications, has been cropping up on distressed investors’ radar recently as both companies are evaluating ways to address their bloated capital structures while also trying to reduce customer churn and reverse a downward earnings trend.
On the balance-sheet front, CEO Tony Thomas told investors last week at the Goldman Sachs conference that the company plans to monetize its fiber network assets that it still owns and use proceeds to pay down debt.
The CEO said he is not considering a sale-leaseback transaction like the Uniti deal but a straightforward sale of its long-haul and metro fiber assets to peers that are well-positioned to buy both the assets that generate cash flows and the ones that are “dormant.” While the company is ready to execute a transaction as fast as possible if the valuation is fair it won’t do a “fair sale if the value is not there.”
Proceeds will be used to accelerate the payment of the company’s 2020 and 2021 maturities. The company has a USD 700m 7.75% senior unsecured note due 15 October 2020, followed by a USD 1.39bn Libor+400bps B6 term loan due March 2021 and a USD 809m 7.75% senior unsecured note due 1 October 2021. “Investors are telling us [that] taking care of those maturities could unlock a significant amount of value in our equity,” Thomas concluded.
The 7.75% notes due 2021 traded at 75.7 today to yield 16.1% from 78.1 to yield 15.1% on 15 September, while its 7.75% notes due 2020 traded at 84.5 today down from 86 on 15 September, according to MarketAxess.
A Windstream representative said that as a matter of corporate policy the company does not comment on rumors. A spokesperson for Aurelius declined to comment.