Near-dated CDS tied to Windstream Communications has widened this week as investors turn to the synthetic market to express views about the potential for litigation tied to a 2014 spinoff, said a trader and two buysiders.
While management made it clear to investors during a conference last week its belief that the spinoff of fiber assets into Uniti Group was within covenant parameters, some market participants are still wary about the consequences of a prolonged legal battle. The concerns are heightened by suspicions that Aurelius Capital is behind the effort to question the deal, considering the firm’s similar tactics against NII Holdings and Intelsat.
“People are trying to figure out if a letter [claiming a covenant breach] was sent, [..] and are buying protection to hedge themselves” said a trader.
One-year CDS on Windstream is quoted 4 points wider today at 17/20 points upfront. Meanwhile, five-year CDS on Uniti, formally known as CS&L, was quoted 6.25/7.75 points upfront compared to 2.75/3.75 last week, said a trader.
“It’s all about the probability and timing of a bankruptcy at Windstream,” said a desk analyst, adding that “investors are worried that the lease payments from Windstream to Uniti could be reduced.”
Windstream announced the Uniti transaction back in July 2014, 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 per year. Now investors are concerned that the transaction saddles the company with high annual fixed costs at a time when earnings are on a downward trend.
“That’s a big part of the problem because revenues go down and that number doesn’t change,” said a desk analyst.
S&P Global Ratings downgraded both Windstream and Uniti corporate ratings yesterday to B from B+ and raised concerns about a possible lease renegotiation that would negatively impact Uniti’s financial health.
“We expect that in a stress scenario, Windstream could try to renegotiate lease payment terms, which if entertained, could have a materially negative impact on Uniti’s financial performance,” noted S&P analysts.
The ratings agency also warned about Windstream’s ability to pay down its medium-term debt, especially if customer losses continue and sales growth remains weak.
Some of Windstream’s bonds are already trading on a recovery basis rather than yield, noted a desk analyst. “People are looking at how many coupons they can clip in the next two to three years and what’s their recovery on the bonds,” said the analyst.
Windstream’s USD 344m 7.5% senior notes due 2023 traded at 71.2 to yield 15.4%,down from 72.25 to yield 15% on 19 September and 74.75 to yield 14.2% on 15 September, according to MarketAxess. Meanwhile its 7.75% notes due 2020 traded at 81 today to yield 15.8%, from 82.75 to yield 14.9% on 19 September and 84.5 on 18 September, according to MarketAxess.
Uniti’s USD 1.1bn 8.25% senior notes due 2023 traded at 91.75 today down from 92.5 on 19 September and 95.37 on 18 September, while the USD 400m 7.125% senior notes due 2024 traded at 88 on 19 September down from 91.75 on 18 September and 92.25 on 15 September.