Friday ended poorly for Windstream and well for the hedge fund Aurelius Capital Management. A Manhattan federal court has ruled against the service provider, and if the judgement holds up then the company might be facing a date with BK.
At the crux of the issue is Windstream’s spinoff of its fiber and copper assets into the company that is now Uniti Group in 2015. Aurelius has contended that by doing that the company defaulted on its bonds, and a judge has now agreed. The price tag is not minor: $310M.
It’s not over yet of course, there are still appeals ahead I’m sure. But the stock isn’t taking it well in extended trading. Just how it will all turn out in the end is unclear, but operationally nothing will change much any time soon.
Windstream has been making significant strides in leveraging the assets it spun off and leased back from Uniti, investing in new routes and improving its wholesale and enterprise business. Hopefully the financial and legal issues won’t derail that progress too badly.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!
Categories: Financials · ILECs, PTTs
Join Our LinkedIn Group
The idea of creating a REIT was a joke 4.5yrs ago when it was proposed and yesterday we got the punchline.
The entire WIN board that supported this insanely suicidal transaction should be barred from serving on another board ever again.
https://www.telecomramblings.com/2014/07/windstream-spin-network-reit/
And if anyone thinks this Aurelius Capital decision won’t hold up I remind you that they wrote the playbook on this type of transaction earning a cool $2b from the Argentine government when they defaulted on GDP-linked gov’t bonds that Aurelius bought for pennies on the dollar.
“How one hedge fund made $2 billion from Argentina’s economic collapse ”
https://www.washingtonpost.com/news/business/wp/2016/03/29/how-one-hedge-fund-made-2-billion-from-argentinas-economic-collapse/?noredirect=on&utm_term=.eb4883525474
So I’ve now read the full 55 page decision and all I can say is Windstream if F%^ked! Not only was this a pure sale lease back arrangement, it was a horribly executed sale leaseback arrangement.
While Windstream pretended the transaction was something other than a sale leaseback to investors, SEC and tax authorities in order to enable this transaction it LITERALLY told state regulators it was a simple sale/leaseback, sort of like telling your kids mommy and daddy aren’t splitting up but daddy isn’t going to live here anymore. (That lie only works so long.)
Now Windstream will be tossed into BK and the only way out of this now is for UNITI to acquire all the all of Windstream (and their subsidiaries). Seems ‘relatively’ easy BUT WAIT. UNITI is a REIT. Unfortunately, their REIT status can’t survive b/c when UNITI becomes a full-on regulated telecommunications company (which they will have to become when they acquire Windstream out of BK), they will immediately lose their REIT status. (Ah, to be the lawyers, accountants and investment bankers to clean up the mess all the lawyers, accountants and investment bankers made in the first place.)
How brilliant was Aurelius Capital Management? Well, not only did Aurelius purchase a block of bonds so they could take Windstream to court for being in technical default on the bonds they purchased which yielded them a cool $310m award, they also purchased Credit Default Swaps (CDS) on Windstream, sort of like betting you can beat up your little brother and then making side bets with others that you can.
So for all of those who jumped on en_ron_hubbard’s bandwagon 4.5yrs ago mesmerized by the ‘shiny new toy’ of an ingenious telecom REIT, I’d say look real carefully the next time that investment banker shows up at the board meeting pitching a way to turn straw into gold.
As noted here on Telecom Ramblings on Aug 1, 2014:
“This deal is pure financial alchemy, converting $250m/yr in debt service into $650m/yr of rent. If people don’t see this, they are completely mesmerized by the financial engineering wizardry, not the raw elements of this transaction.
This event does not enhance by one iota Windstream’s operations, marketing, branding, customer experience, vendor relationships, etc. (Every response to this comment will say “we never said it would.”) Yet the very same people who will say we never said it would improve one thing about Windstream’s operations, marketing, branding, customer experience, etc., somehow will say this REIT will unlock serious amounts of value?
We’re not talking about a company with multiple lines of business where the fresh new fast growth line of business is underappreciated because a stodgy slow growth line of business obscures its value. We’re talking about waving a magic wand, filing some paper work with the IRS and the SEC and POOF we create value.
Every dollar of value WinREIT enjoys, WIN should lose. Now, that may not immediately happen b/c some analysts will convince gullible investors in some HumptyDumptyian & Rumpelstiltskinian way that the naked emperor has clothes and that they’ve figured out a way to spin straw into gold, respectively.
If WIN was a wrinkly old piece of fruit to use En_Ron’s characterization, it still is. This transaction does nothing to hydrate it.”
https://www.telecomramblings.com/2014/07/windstream-spin-network-reit/#comment-19769
And again on April 4 2016
“PURE ALCHEMY
Let’s review a few things first. When this blockbuster of an idea first started trading CSAL closed on April 20, 2015 at 30.03 and WIN closed at 12.81. CSALs now trading at 22.63 (down 25%) and WIN is now & 7.79 (down 39%). The NASDAQ TELECOM INDEX is down 6.9% during same period.
I said it back in August 2014 when WIN first floated this cockamamie idea and I’ll say it again, this is pure financial alchemy.
http://www.telecomramblings.com/2014/07/windstream-spin-network-reit/#comment-19769
What is even more bizarre about today’s news is that both stocks are up today. There is no incremental value being created here. It is merely a sale/lease arrangement of assets where party A sells the assets to party B so that party B can charge party A to use those same assets.
Under this arrangement there is no reason whatsoever that share prices for both parties should go up on this news. Yet, miraculously, they did.
As I said elsewhere in the comment section when this idea was first floated:
“This deal is the equivalent of your mortgage company offering to buy your home and then rent it back to you at 2.5x your current mortgage payment.
Strip away all the complex capital structure gobbledy-gook and this transaction results in an annual net cash OUTflow increase of an astounding $400m/yr for WIN. Effectively, someone’s figured out a way to take $256m/yr in debt service and turn it into $650m/yr of “rent” by shuffling some papers through the SEC and the IRS.”
PURE ALCHEMY”
https://www.telecomramblings.com/2016/03/csl-does-another-windstream-deal/#comment-55482