A bankruptcy judge in New York last week approved Windstream Holdings Inc.’s request to use up to $24 million for bonuses for executives.
The Little Rock telecommunications company will set aside $18.9 million as bonuses for its top five executives if they hit all their 2019 goals. That request had been $20 million, but Windstream agreed to reduce that amount.
Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York also will allow Windstream to use up to $5 million as bonuses to keep “key employees,” according to the company’s bankruptcy filing. Windstream said in the filing that it has lost some key employees and others have been aggressively pursued by other employers, including Windstream’s competitors.
Windstream Holdings and all of its subsidiaries filed for Chapter 11 bankruptcy reorganization in February, less than two weeks after a New York hedge fund, Aurelius Capital Management, received a $310 million judgment against Windstream’s subsidiary, Windstream Services LLC. Aurelius said that Windstream’s 2015 spinoff of its fiber and copper assets into a separate company ran afoul of bond covenants.
On April 23, Windstream asked for the bankruptcy court’s approval to keep its Key Employee Incentive Program, which provides incentives for five Windstream executives, including CEO Tony Thomas and CFO Robert Gunderman, to hit their 2019 goals. In addition to Thomas and Gunderman, executives subject to the KEIP are Layne Levine, president of enterprise and wholesale; Jeff Small, president of Windstream’s Kinetic business; and Kristi Moody, executive vice president, general counsel and corporate secretary.
In its filing, Windstream argued that the company believes that “appropriate, incentive-based compensation opportunities remain an important tool to drive performance.”
Windstream’s request didn’t go unnoticed. On May 3, U.S. Trustee William K. Harrington filed an objection, saying that its performance metrics for the bonuses “are well below” the company’s current financial projections.
Windstream’s total revenue for 2019 is projected at $5.14 billion, down 7.2% from the previous year.
Windstream, however, said in its filing on May 13 that the two bonus programs were “critical to the ongoing success” of the company. Judge Drain agreed.
“We are pleased with the court’s approval of the performance incentive and retention plans, as well as the progress to date in the reorganization process,” David Avery, a Windstream spokesman, said in an email to Arkansas Business. “The company intends to move through the process as quickly and efficiently as possible.”
Robbin S. Rahman, an attorney at the Barber Law Firm in Little Rock, wasn’t surprised by the judge’s ruling for the bonuses. Rahman practiced in Atlanta for 15 years, handling restructuring and bankruptcies for large companies before moving to Little Rock in 2017.
“The big thing is really what it says about the overall case,” said Rahman, who has followed the Windstream case, but wasn’t involved in it. “If there was a concern about liquidation or just a piecemeal breakup of the company, … you probably wouldn’t see the type of incentive plan or retention plan that they put in place.”
The retention plan calls for an initial payment of about $3.8 million of the $5 million to be divided among 112 employees, with the average bonus being $34,000 and no employee receiving more than $250,000, Drew Smith, the senior vice president of financial planning and assistant treasurer for Windstream Holdings, said in Windstream’s filing.
Windstream has not allocated the remaining $1.2 million and planned to keep that in reserve for when it’s needed, Smith said.
Harrington disagreed with the plan, saying in his May filing that average bonuses start at $6,000, hit $10,000 for staff managers, and go to an “astounding” $100,000 to $200,000 for executive vice presidents.
He said Windstream’s request was “too vague” and the company wanted to pay “whomever they want, whenever they want” with the money. He asked the judge to reject Windstream’s proposal.
Rahman, who reviewed the proposals for Arkansas Business, said he didn’t see the bonus proposals as being particularly unusual.
“The knee-jerk reaction of anyone who sees these types of plans is to say, ‘Hey, wait a second. These are the same guys and gals who got us here. Why are we going to reward them these potentially very rich bonuses?’” Rahman said.
But he said that’s not the way the bankruptcy system works. “If they lost all of their key executives and if they lost all of their managers, I have to believe that would be a serious problem for an operational company in a highly competitive telecommunications market,” he said.
Hitting the Goals
For the top five executives to receive all their bonuses, Windstream will have to hit a number of company goals, which won’t be easy, Smith said in the filing.
He said that while 2018 showed improvement and progress toward company goals, “it was a reversal of recent trends” that Windstream can’t be certain will continue, especially in light of the bankruptcy reorganization and the publicity that came with it.
One of the metrics will be measuring its broadband customers and building market share.
Its threshold of 20,000 net broadband customers this year would be an improvement of 2018’s 14,000 net additions and 2017’s net loss of about 44,000 broadband customers, Smith said. The filing didn’t say how many customers Windstream has.
Windstream also reported last week a first-quarter net loss of $2.3 billion, or $54.26 per share.
In the first quarter of 2018, Windstream had a net loss of $121 million, or $3.25 per share.
Revenue for the quarter was $1.32 billion, down 9% from the same quarter last year. The company said results include a $2.3 billion noncash goodwill impairment charge in its Consumer and Enterprise and Wholesale segments.
Smith said in his filing that the management team also has to work to convince customers, vendors and employees to “stay the course and provide comfort” that Windstream is operating as usual during the bankruptcy.
Rahman, the Little Rock attorney, said it is harder to attract business when a company is in Chapter 11 bankruptcy. Most people don’t understand the difference between bankruptcy reorganization and liquidation.
Some vendors think that they won’t be able to collect on invoices if a company is in bankruptcy, Rahman said. Or they don’t want to deal with the headache of having to make the disclosures they have to make when they deal with a debtor.
“And those are all very reasonable reactions to bankruptcy,” he said. “It’s just something that a debtor just has to deal with.”