Motion by two banks could potentially cripple carrier’s ability to operate
If two banks get their way in bankruptcy court, financially strapped Windstream will stop making payments to its spinoff partner, Uniti, on a lease agreement that gives it access to its telecommunications network until it satisfies debts to creditors.
The Lowdown: At the end of June, UMB Bank and U.S. Bank – two of bankrupt Windstream’s creditors – fielded a motion in U.S. Bankruptcy Court for the Southern District of New York seeking an order to halt the $54 million per month payment to Uniti. The creditors argue that the lease agreement is not “rent” but rather a financial arrangement between the two companies. Further, the creditors say Windstream should retain cash until it pays back creditors.
The Details: Uniti is the network and real estate division spun off by Windstream and is at the heart of its Chapter 11 bankruptcy. According to published records, Windstream has a lease agreement to access Uniti’s network through 2030. The annual rent of the network is $659 million. The federal bankruptcy court will hold a hearing on the motion on July 26. Windstream already objected to the motion, saying its an end run on the established bankruptcy process and called upon the banks to withdraw.
In a statement, Uniti makes its position clear: It owns the network on which Windstream operates. Failure to make payments, it says, will mean losing access to the network. Further, Uniti contends that the relationship with Windstream is a legitimate lease, a position it believes the bankruptcy court will uphold.
While fending off creditors’ court actions, Windstream is negotiating with Uniti for a reduction in the network access rent payments. During the last quarter’s earnings call, Windstream CEO Anthony Thomas said the talks could result in a payment reduction of as much as 80% due to the decline in copper network value.
The Impact: The potential impact on Windstream’s operations is unclear. If the court orders an end to the rent payments, Windstream’s ability to operate will be curtailed and its financial position will be further exacerbated. Additionally, partners and customers would suffer from the decreased operating capacity. However, a court order would likely draw appeals that would stay any immediate cessation of payments or a reduction in Windstream’s access to Uniti’s network.
Background: Windstream Holdings, the parent company of Windstream Communications, filed for bankruptcy protection in February following a legal-battle loss with bondholder Aurelius Capital Management. Aurelius filed a lawsuit claiming that Windstream spinning off Uniti improperly reduced the value of its bonds. The court loss pushed Windstream into default on the total portfolio of bonds, amounting to more than $5.6 billion. Windstream is working to emerge from Chapter 11 bankruptcy sometime later this year.
The Buzz: “Uniti’s relationship with Windstream is simple: Uniti owns the network that Windstream uses to service its customers, and Windstream must continue to pay rent in order to maintain access to the network. Otherwise, it will not be able to operate its business,” said Uniti CEO Kenny Gunderman in a statement. “This latest effort by out-of-the-money junior creditors of Windstream to extract value from Uniti does nothing to change that essential fact. Consistent with the views of Windstream’s counsel and advisors when the lease was established, we believe that the lease is a true lease and will be respected and enforced as such, and we will vigorously contest any argument to the contrary.”
“At the moment, [Windstream’s] leverage is considered very high, but in order to reduce that leverage they need to know what the cost of the lease payment to Uniti would be,” said Debtwire Associate Editor Paunie Samreth. “They need to figure that out first before they can figure out the proper cap structure for this company. From there that should help them, assuming the leverage is reduced, on the operational side of things in terms of investing more in their services and stuff like that.”