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Lawyer Fears Default Ploy Used in Windstream Case Will Spread

3 min read

A Little Rock attorney fears Aurelius Capital Management’s recent $310 million judgment against Windstream Services LLC of Little Rock could trigger other distressed investors to try a similar legal maneuver.

“They hit a home run,” said Robbin S. Rahman, an attorney at the Barber Law Firm in Little Rock. Rahman practiced in Atlanta for 15 years, handling restructuring and bankruptcies for large companies, before moving to Little Rock in 2017. He has followed Windstream’s case, but wasn’t involved in it.

“So that’s going to motivate … other smart distressed investors to keep digging and see if they can find their own unicorn and to try and … boost the returns,” he said.

Windstream Services is a subsidiary of publicly traded Windstream Holdings Inc., which had been operationally healthy before Aurelius Capital Management of New York received its judgment in February.

Aurelius, a hedge fund, owned a number of bonds issued by Windstream Services. In a 2017 lawsuit, Aurelius alleged that Windstream’s 2015 spinoff of its copper and fiber assets into a real estate investment trust, publicly traded Uniti Group Inc., violated the terms of some of its outstanding bonds. Windstream’s “intricate set of legal and financial maneuvers” had breached a covenant in the bonds that restricted sale and leaseback transactions, U.S. District Judge Jesse Furman of the Southern District of New York wrote in his 55-page finding. As a result of the technical default, Windstream was on the hook to repay bondholders immediately.

Windstream denied the allegations, but Furman sided with Aurelius and awarded the $310 million judgment.

Rahman pointed out that Aurelius Capital Management also held credit default swaps, which would be used to counter the risk in the event of a default on the Windstream bonds. So Aurelius couldn’t lose, he said.

“They either get paid on the bonds because there was no default, or they get paid on the CDS because there was a default,” he said.

Firms that issue credit default swaps might stop selling them if “there’s an increased incidence of manufactured defaults,” Rahman said.

Rahman compared Aurelius’ strategy to “buying property insurance on someone’s home and then going and burning it down.” He said distressed debt investors are searching bond documents for ways to attack otherwise healthy companies.

“You’ve got this operationally healthy company that in normal times would have just cruised along under these notes,” which were set to expire in 2023, Rahman said. Windstream would have retired the bonds and “nothing would have ever happened.”

Windstream, though, isn’t blameless, Rahman said. When Windstream did the transaction, it was “well aware of this provision that there’s a prohibition against sale leaseback transaction after the issuance of the bonds,” he said. “So they went into this transaction knowing full well that this provision existed, and they did it anyway.”

Windstream, which has about 13,000 employees, including about 1,200 in Arkansas, provides telecommunications and networking services to businesses and broadband internet and entertainment services to consumers.

Less than two weeks after the judgment, Windstream Holdings filed for Chapter 11 bankruptcy reorganization in the Southern District of New York. Windstream received a commitment from Citigroup Global Markets Inc. for $1 billion in debtor-in-possession financing, Windstream said in a news release.

“You don’t get that unless your underlying operational health is very high and everyone has a lot of confidence that you’re going to come out the other end,” Rahman said.

He said he thinks Windstream will survive. “There’s still going to be a tomorrow,” Rahman said. “But I don’t see how you characterize this as anything other than a really big failure that they’re going to have to deal with for a bunch of years to come. I’m sure they’ll be fine down the road,” he said. “But at the moment, it’s not great.”

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