Windstream Fights Hedge Fund Over Uniti Group Status

Windstream Fights Hedge Fund Over Uniti Group Status

In “The Big Short,” celebrity chef Anthony Bourdain compares collateralized debt obligations to 3-day-old halibut rebranded as seafood stew. So the folks over at Windstream Holdings Inc. probably winced at a recent article by Bloomberg Markets headlined “The World Converges on Little Rock in Hunt for Returns.”

According to writer Alastair Marsh, the publicly traded telecom with declining revenue had become “a darling of credit investors all over the world” and “features in an estimated $3.5 billion of complex wagers — known as synthetic CDOs …”

It’s more than Whispers can sort out; read the article linked above if you’re so inclined. But one thing caught our attention since it had gone unnoticed locally: a tussle with “a hedge fund that Windstream says is trying to push it into bankruptcy.”

That, it turns out, is a reference to a claim by Aurelius Capital Management of New York that Windstream’s 2015 spinoff of its copper and fiber assets into an innovative real estate investment trust was essentially a sale-leaseback that violated the terms of some of its outstanding bonds.

The spinoff is publicly traded Uniti Group Inc. of Little Rock, headed by Kenny Gunderman and originally called Communication Sales & Leasing Inc.

Violating the bond covenant would be a technical default on the bonds, and Windstream could be on the hook to repay bondholders immediately. Or, more realistically, forced into bankruptcy. And, as Bloomberg reported, “The stakes are high for CDO investors because an estimated $350 million of Windstream credit swaps insuring its debt have been included in CDOs since 2015.”

Windstream sued Aurelius’ bond trustee, U.S. Bank, in state court in Delaware late last month. Then the trustee filed its own suit in federal court in New York, where Windstream has countersued. “Upon information and belief,” the counterclaim alleges, “Aurelius acquired its position in the Notes for the sole purpose of seeking to manufacture this alleged default, and declare that a credit event has occurred or is occurring, in order to collect a credit default swap payoff.”

Credit default swap payoffs were, of course, “the big short” when mortgage-backed securities collapsed in 2008.

Debtwire has been watching this dispute and has noted that Aurelius has a “recent track record” of attempts to “profit from calling out management on allegations of breaching covenants during past transactions.”

And Aurelius seems to be alone in its accusation, while Windstream’s insistence that its spinoff was proper has been affirmed (predictably) by its counsel in the transaction, Skadden Arps Slate Meagher & Flom of New York, and also by the International Swaps & Derivatives Association, a private organization for the credit derivatives industry.

“This is a technical legal dispute,” Windstream spokesman David Avery told Whispers. “We deny the allegations and are vigorously opposing the action in court.

“This has no impact on our ability to serve our customers and to run our business. Because this is a pending legal matter, we cannot comment further or speculate on this issue.”