Well, it’s happened. Windstream Holdings today announced that it has filed for chapter 11 bankruptcy protection. Many saw this as inevitable following the recent court decision in favor of Aurelius for $310M in the wake of the company’s CS&L (now Uniti Group) spinoff back in the spring of 2015.
Windstream’s plan is to use the chapter 11 filing to reorganize its debt, specifically the debt accelerated by the court decision. The company remains committed to operating as usual, and has secured $1B of debtor-in-possession financing from Citigroup to tide it through the process.
The battle with Aurelius is not entirely over. Windstream also spent a few words criticizing Aurelius’s tactics and calling for regulators to look at ‘the ramifications of an unregulated credit default swap marketplace’. However, it’s not too early to say that the company’s decision to spin off its fiber and copper as a REIT back then was ill considered, since today’s filing can’t be called a positive thing.
What happens next is a bit of an open question though. Who will wind up owning the company in the end, and who will end up operating it? And will Uniti Group be drawn into the process explicitly, or just implicitly through its lease revenue from Windstream? Should be an interesting year…
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I guess this will put off any other companies from spinning off a Fiber REIT for a while
Or, at least this will motivate them to read their debt covenants more conservatively…
But I wasn’t aware of any other public US companies spinning off a Fiber REIT any time soon! 🙂
Erm….Zayo, Rob Powell?? That’s exactly Caruso’s planned next move, once he spins off the Infrastructure side of the business from the voice/enterprise side (ie Allstream)…..
That’s not a spinoff, that’s the main company becoming a REIT. Different situation…
Considering 70% of UNIT’s revenue comes from WIN and the master lease is a pre-petition obligation, WIN could, technically speaking, reject the master lease agreement. Of course, practically speaking that’s not likely to happen b/c it would be mutual suicide. (Besides since UNIT’s CEO and WIN’s CFO are brothers, it would make Thanksgiving dinner a bit awkward.)
Nonetheless, I don’t see how UNIT is not dragged into this. What’s unclear to me is what happens to UNIT’s REIT status if UNIT buys WIN.
Anyway you look at it breaking up WIN into a REIT and a services company was a bad idea.
Another thing that’s never been clear to me is specifically what assets the REIT (UNIT) owns and what assets WIN still owns.
Another messy piece of this as outlined in the decision is that WIN has entered into numerous IRU agreements, subleasing to other carriers dark and dim fiber that belong to UNIT.
Another possible, but highly improbable, scenario is another carrier buying WIN out of BK. Under that scenario, a carrier like CTL for example, would buy WIN with the expectation of migrating and grooming all the voice and data traffic onto the acquirer’s network to enjoy large synergy savings. To do that WIN would have to reject UNIT’s master lease agreement. It looks good on paper but in practice it’s really not. WIN doesn’t have to file it’s final rejection list until it’s ready to emerge from BK but if they wanted to reject the master lease agreement with UNIT, they’d have to migrate all that traffic to another network before the final rejection list is submitted to the BK court. That’s not something that can be easily done, especially when you consider UNIT has network where no other carrier does. So they’d have to work cooperatively with UNIT and I can’t see UNIT agreeing to this.
Finally, it’s beyond laughable seeing WIN taking potshots at Aurelius’ greed (over the credit default swaps). The entire deal to break Windstream up into two companies in the first place was motivated purely out of greed, not necessity. (It’s like now disgraced former Countrywide Financial CEO Angelo Mozilo accusing now disgraced former Lehman Bros CEO Dick Fuld of being a greedy SOB.)
I’ll refrain from another round of gloating out of respect for the real victims in all of this, the many employees, that are made redundant while the executives line their pockets with retention bonuses that the board will undoubtedly hand out to the very same group of fools that got WIN here in the first place.
Why isn’t the most logical scenario that the aggrieved debt holders take over ownership, the UNIT master lease agreement remains in place (possibly modified to clarify items you mentioned), and operations continue as usual – albeit with a pause in any meaningful directional changes by the company for a while?
I agree that an outside company coming in as some kind of white knight seems unlikely, I can’t think of anyone with both the means and the willinginess to stick his hand into this woodchipper unless the situation becomes more clarified.
I agree it’s possible for the creditors to do this. But since the creditors will hold the equity too, I would think they’d like a scenario where the company could be sold in the future. Why would any carrier buy WIN when they’re locked up in a long-term master lease agreement with UNIT?
The UNIT handcuffs are the equivalent of an anti-takeover measure.
I think your scenario is possible but not without a renegotiation of the master lease agreement.
Rob, I should also add the issue of the state regulators. That’s a wildcard. The decision makes it abundantly clear that WIN’s management lied to them when this deal was first hatched, telling regulators it was a simple sale/leaseback arrangement while telling IRS, SEC, and investors it was something else.
I would think the regulators won’t be so kind this time around. State regulators can’t dictate WIN’s future but they can sure tell them what they will and won’t accept.
CenturyLink buying Windstream, that’s an interesting proposition. One welfare Queen taking out another.
“There’s a tremendous amount of this type of asset embedded in some very big companies around the country,” said Kenny Gunderman, executive vice president of Stephens Inc., which advised Windstream on the transaction. “It’s really billions and billions of dollars.”
I went through the Chapt 11 at XO back in the day.
Someone else needs to pick up the pieces at this point.
XO had 3 buyers at one point.
Almost anyone who’s been in this industry for the last 20yrs has been through a bk. The chapter 11 wave began with ICG on Nov 14, 2000. Everyone chalked up their bk to bad management (which they had) not a 4-6yr trend that would sweep the telecom industry due to unsustainable (and unservicable) debt loads.
https://www.wsj.com/articles/SB974238961963838987
I’m not suggesting that anything like that is upon us again, but there are some troubled telcos floating around. Frontier is not in the greatest shape. Certain CTL numbers have been getting progressively worse (but not even close to a bk concern).
Nonetheless, it’s important to note that BK’s generally come in waves. This is partly b/c carriers that go into BK can clean up their balance sheets by eliminating debt and thus emerge selling their services at lower prices putting pressure on those carriers still saddled with large debt loads.
Furthermore, lest we forget, WIN’s financials weren’t that impressive and were rapidly deteriorating before the Aurelius death blow. Did Aurelius merely accelerate an event that likely to happen anyway in 12-18months?
How many small vendors will be impacted by WIN not paying pre-announcement obligations? Did they make sure those vendors got paid prior to announcement?
How many times do telco’s get to write-off debt (and other bad management decisions) on the back of vendors that build their networks? What other industry operates like this?
ACAM, CAF-2 funding should be withheld for paying the network obligations.
Best to all those contractors who are figuring out what they’re going to do while WIN Sr. Mgmt. is allowed to operate “business as usual”.
Sorry, rant over…..
All great points(!!!), however, telecom bankruptcies aren’t unique. We’ve see it in real estate (1980 & 2008), oil (2014), airlines, etc. The vendors and competitors in those industries were equally impacted by the cascade of bankruptcies that a telecom bankruptcy causes.
The intent of Chapter 11 isn’t terrible: A company that still operates has more value than one that shuts its doors which forces thousands into unemployment and causes more harm to the company’s creditors who will only be able to sell idle assets rather than an ongoing business.
That said, Chapter 11 has knock-on effects that reverberate throughout an industry. These reverberations are felt by healthy companies that, as noted in previous post, must now compete with the company that has suspended debt service payments, eliminated unprofitable contracts, renegotiated unfavorable contracts, reduced salaries, etc.
Consequently, Chapter 11 can be viral, spreading — like any biological virus — to competitors and vendors unless it’s adequately contained. The question becomes how contained is this? It’s a question that’s rarely asked until the virus has already begun spreading across an industry. (BTW, the spreading comes about, in part, b/c competitors’ CEOs don’t want to share with investors or analysts that a Chapter 11 filing by Company A will affect Company B. So they keep it to themselves until they can no longer hide the outward effects of the virus they’ve caught. By then, it’s too late.)