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Proof there are a million ways to value invest WIN/UNIT


Gregmal
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Humble take.

It is the story of an activist-type hedge fund that gets involved in distressed scenarios and who is ready to use variable strategies in order to realize large gains.

The case seems to revolve around the definition of a sale-leaseback transaction done by a sub of a holding company that had issued bonds with indentures that could be interpreted in many ways.

The judge had to decide if the issuing firm unfairly avoided default or if the active player in the restructuring is trying to fabricate a default.

The latter won the last battle but I would say that the jury is still out.

 

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I read the decision. There were two main issues.

 

Was the sale of the network a sale-leaseback? If so, they violated their covenants and had an event of default, which required them to buy back these bonds. I'm not a lawyer, but it seems pretty obviously yes.

 

The second question was did they successfully weasel out of the default by converting other types of bonds into this class and getting them to waive the default. Still not a lawyer, and the judge ruled their machinations didn't count because the new debt wasn't allowed to vote under the indenture.

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This is a pretty interesting situation.  When Windstream did the exchange for this debt maturity, those that exchanged the debt agreed to waive the default claim.  I think a majority of the bondholders did the exchange, except Aurelius of course. Will be interesting to see how this “forced default” plays out in court, not only with Aurelius but also with the other bondholders.  I suspect this situation will drag out for quite some time.

 

Not sure if anyone here has an actual stake in either Windstream or UNITI.  I took a 1% position in UNITI a while back on the belief that they will continue to diversify away from Windstream, the master lease for the fiber assets is unlikely to be rejected in court (and if it is, I have trouble believing the subsequent renogiation will be crushing to Windstream), and the belief that they will slash the dividend and use the cash flow to invest in additional assets to continue diversifying away from Windstream.  Given the after hours debacle with WIN and UNITI, I hope UNITI management uses the ensuing storm to slash the dividend now, and put that money to more productive use.

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This is indeed a very interesting situation.

After some thought, I wonder if Windstream has a decent shot at a successful appeal.

 

The decision's foundation rests on the literal definition of the sale-leaseback transaction, listed as a negative covenant and the logical outcome of default, with retro-active effect. The result of this judgement, if it stands, will result in a (undefined) benefit to Aurelius and a potentially negative outcome for others.

 

The outcome may be the result of emphasis of form over substance. A conceptual way to evaluate what Winstream did is to see it through the lens of a succession of out-of-court restructuring attempts to get through a temporary period of distress. The economic reality of the 2015 transaction quite clearly corresponds to a sale-leaseback transaction but the delay before any debt holder officially notified the issuer suggests that there was an implicit consent and the second phase of the restructuring (the 2017 bond exchange transaction) was also met by consent from most bondholders. The intent of Aurelius, when they sent their notice of default in September 2017 and invoking a chicken or egg question, linking the 2017 and the 2015 transactions, could be interpreted as a way to cause a default in order to benefit. By waiting before reacting to the 2015 transaction, my take is that Aurelius provided a tacit consent to the ongoing restructuring efforts and forcing a default by referring to a previous event effectively prevents Windstream from completing out-of-court restructuring steps that could have maximized the outcome for all participants (equity holders, debtholders, partners, workers, community etc).

 

Also interesting to see that Aurelius was sitting face to face to Elliott Management, in this specific case.

 

Just my 2 cents.

 

 

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The judge specifically addressed the argument of a delay barring the claim:

 

Second, Services contends that the Trustee’s and Aurelius’s arguments are barred by the

doctrine of laches. See Services PFFCL ¶ 265. In a similar vein, Services suggests that

Aurelius’s request for relief should be rejected because Aurelius failed to seek emergency relief

to prevent the Third Supplemental Indenture from taking effect. Id. ¶¶ 263-64. That is, Services

argues that Aurelius undermined its means to cure any alleged default relating to the 2015

Transaction by waiting an excessive length of time before seeking to declare a default and that its

failure to seek injunctive relief in the first instance defeats Aurelius and Trustee’s claims. See

Tr. 742-43; see also Services Am. Countercls. ¶ 105. Translated into more colorful terms,

Services contends that “the proverbial egg has not only been scrambled, but eaten and digested

by marketplace investors long ago,” and, on that basis alone, the Court should deny the Trustee

and Aurelius equitable relief. Docket No. 178 (“Services Opp’n”), at 43.

There is some irony to these arguments insofar as Services, in the same breath, faults

Aurelius for violating the Indenture’s no action clause by acting too hastily. Services PFFCL

¶¶ 258-62. But, regardless, Services’ argument is without merit for several reasons. First, “[t]he

equitable doctrine of laches . . . does not apply to the delayed exercise of a contractual right.”

DiStefano v. Maclay, 102 F. App’x 188, 190 (2d Cir. 2004). Second, Aurelius did promptly seek

relief, raising the propriety of the 2017 Transactions in real time and filing its counterclaims only

fifteen days after the Third Supplemental Indenture was signed. See Docket No. 72. Services

cites — and the Court has found — no authority for the proposition that, in such circumstances,

the failure to seek emergency injunctive relief is a bar on obtaining relief altogether. Third, and

in any event, Services’ own counterclaims would defeat its argument, as Services puts at issue

the very questions it asks the Court to ignore on the basis of Aurelius’s and Trustee’s supposed

delay. And finally, in this respect, what is good for the goose is good for the gander: Services

was well aware of Aurelius’s view that the 2017 Transaction was invalid when it directed the

Trustee to sign the Third Supplemental Indenture. See, e.g., DX-155; DX-156; DX-157. To the

extent that Services desired peace of mind — for either its own sake or the sake of investors in

the New Notes — it presumably could have sought immediate judicial relief itself. Having failed

to do so, it cannot now be heard to complain that it was prejudiced by the other parties’ delay.

These compelling reasons aside, “[t]he determination of whether laches bars a [party]

from equitable relief is entirely within the discretion of the trial court,” Tri-Star Pictures, Inc. v.

Leisure Time Productions, B.V., 17 F.3d 38, 44 (2d Cir. 1994), and the Court concludes that

there is no good reason to impose such a bar here. To be sure, granting relief to the Trustee and

Aurelius at this juncture would undoubtedly have a significant (albeit hard to assess) impact on

Services, investors, and the market generally. But that goes with the territory — and,presumably, investors took the risk of such relief into account, as the parties’ dispute was well

known. The fact is that this case was litigated in real time and, given the stakes, proceeded from

initial complaint to trial quickly. To accept Services’ argument would, in effect, immunize large

public companies from scrutiny for corporate transactions unless emergency relief is sought and

obtained. The law does not impose that burden on investors or the courts.

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The judge specifically addressed the argument of a delay barring the claim:

 

Second, Services contends...

Thanks bizaro. I saw that but maintain that the issue is not so clear-cut.

 

Out-of-court workouts are tough but, in some cases, sufficient and much less costly than BK restructurings. In this specific case, there is a toxic mix of creditor opportunism who wants to fabricate (or at least time) a default and debtor coercion who wants to fabricate a consent.

 

During this workout, distorted negotiations were expected but my point is that the holdout problem that arises from a specific participant may be related to a private agenda possibly tainted by a conflict of interest. Pure application of contract law may not work so well here.

 

A striking feature in this case is that a majority of bond investors followed  through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants.

 

In terms of where the money is in this scenario, the outcome has a binary nature with retro-active implications that will get more and more potentially adverse over time, and the outcome may have something to do with who is sitting on the bench, which is hard to discount. Also, uncertainty (increased now) will persist and will put pressure on the cost of capital (both Uniti and Windstream) in industries where the cost to access to market often makes the difference.

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I read most of the lawsuit Findings of Fact and Conclusions of Law.

 

I am not a lawyer but it seemed pretty clear that Windstream violated they covenants of the bonds and did a sale leaseback.

 

I would not touch Uniti here, as Windstream could easily file for BK (perhaps from this ruling) and then Windstream rejects the Master Lease in Bankruptcy and would likely end up paying much, much less for the lease payments to Uniti.  Who knows what market rates would be - perhaps half of the $650m?  I don't know.

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The judge specifically addressed the argument of a delay barring the claim:

 

Second, Services contends...

 

A striking feature in this case is that a majority of bond investors followed  through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants.

 

 

I think its relevant (and so did the judge, who mentioned it) that of the original owners of the bonds in question, less than a majority voted to waive the default. Windstream got a large majority of the bonds that the exchanged into that indenture, but without that (pretty dodgy, imo) exchange, they wouldn't have had the majority and wouldn't have a waiver of the default.

 

The transaction being a sale-leaseback seems pretty straightforward to me, so I doubt that's very likely to change on appeal. Maybe they can get the waiver of the default to stand somehow, that seemed less obvious to me.

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The judge specifically addressed the argument of a delay barring the claim:

Second, Services contends...

A striking feature in this case is that a majority of bond investors followed  through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants.

I think its relevant (and so did the judge, who mentioned it) that of the original owners of the bonds in question, less than a majority voted to waive the default. Windstream got a large majority of the bonds that the exchanged into that indenture, but without that (pretty dodgy, imo) exchange, they wouldn't have had the majority and wouldn't have a waiver of the default.

The transaction being a sale-leaseback seems pretty straightforward to me, so I doubt that's very likely to change on appeal. Maybe they can get the waiver of the default to stand somehow, that seemed less obvious to me.

These are valid points of view.

Windstream, it seems, instead of facing head-on the delayed notification of default with litigation decided to try to circumvent Aurelius with an add-on of notes maneuver that would have created (from the indenture) a new "single class for all purposes" including voting and that makes sense from a restructuring point of view but that, in substance, is a 'dodgy' way to deal with the situation, a conclusion reached in the last decision.

But.

Windstream completed the sale-leaseback transaction in 2015 and, effectively, because there were no (AFAIK) official adverse reactions, was acknowledged with 100% consent from the bond owners of all classes. More than two years after, when Windstream went ahead with more restructuring action (noise at that point that a fixed income activist is involved), a notice of default is sent by Aurelius (relevant questions: when was the bond stake built? and what was their net position on all Windstream-related securities?). I understand that Aurelius held part of only one of the series of bonds and Windstream carry the typical cross-default and cross-acceleration provisions.

 

Think intent and economic reality here.

Let's say you held Windstream notes in 2015 after the sale-leaseback transaction do you notify a default or decide to follow the situation? Why?

Let's say you held Windstream notes in 2017 after the notification of default. Do you side with Windstream or Aurelius? Why?

I would say that the individual intent has to do with maximization of individual outcome and the rules of the games should optimize the net maximization of value for all while maintaining a fair playing field to determine how this maximized outcome is shared.

 

I have followed the CDS market for a while and feel that the regulatory/legal structure has difficulty catching up. More work needs to be done on empty creditors.

https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/

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If I held WIN notes in 2015, I would have been annoyed and sold at a loss. But I'm just a small fish.

 

If I had a few hundred million in WIN notes I definitely would have looked at suing to enforce the indenture.

 

That's the biggest reason I personally like this decision. I think WIN was playing fast and loose with investor protections. Nobody called them on it, because most credit investors aren't activist. But I think it's good for the markets if public companies have to respect their contracts and obligations.

 

My two cents obviously, and different points of view are likely just as valid. I have no position here and am unlikely to start one. (Unless maybe Uniti has some beaten down debt issues or something, I might try and look into that if I get some time)

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This is a pretty interesting situation.  When Windstream did the exchange for this debt maturity, those that exchanged the debt agreed to waive the default claim.  I think a majority of the bondholders did the exchange, except Aurelius of course. Will be interesting to see how this “forced default” plays out in court, not only with Aurelius but also with the other bondholders.  I suspect this situation will drag out for quite some time.

 

Not sure if anyone here has an actual stake in either Windstream or UNITI.  I took a 1% position in UNITI a while back on the belief that they will continue to diversify away from Windstream, the master lease for the fiber assets is unlikely to be rejected in court (and if it is, I have trouble believing the subsequent renegotiation will be crushing to Windstream), and the belief that they will slash the dividend and use the cash flow to invest in additional assets to continue diversifying away from Windstream.  Given the after hours debacle with WIN and UNITI, I hope UNITI management uses the ensuing storm to slash the dividend now, and put that money to more productive use.

 

I took my bath today in the Uniti common, sold for about a 25% loss on the original investment.  I am surprised that the Uniti management did not throw everything in with the kitchen sink today.  Given how their shares reacted today, I think they should have dramatically cut the dividend today also.  Instead, by waiting and delaying what I think is inevitable, there will be a second leg down, and lower, in the future.  Either this, or I am the dummy at the poker table, and they are very confident that the three remaining OpCo/PropCo deals in the pipeline will get them to a point where the dividend is more secure.   

 

Anyways, given all of this, I moved into the Uniti bonds today, also at about a 1% allocation.  Bought it at about 80, which is ~14% YTM.

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If I held WIN notes in 2015, I would have been annoyed and sold at a loss. But I'm just a small fish.

 

If I had a few hundred million in WIN notes I definitely would have looked at suing to enforce the indenture.

 

That's the biggest reason I personally like this decision. I think WIN was playing fast and loose with investor protections. Nobody called them on it, because most credit investors aren't activist. But I think it's good for the markets if public companies have to respect their contracts and obligations.

 

My two cents obviously, and different points of view are likely just as valid. I have no position here and am unlikely to start one. (Unless maybe Uniti has some beaten down debt issues or something, I might try and look into that if I get some time)

The healthy pushback is appreciated. I've learned to respect your judgement but would still push for an appeal in this specific case. :)

As far as WIN and Unity, there is now a cloud of uncertainty that is not going away anytime soon.

 

There's a relevant example that may be instructive in relation to this specific case. Norske Skog was a Norwegian paper company that got into trouble after heavy acquisition financing. Perhaps, because of operational and financial bad decisions, they deserved to file for bankruptcy in late 2017 but AFAIK did not use the same strategies as Windstream when facing liquidity issues. During out-of-court restructurings, involvement of "active" debt investors can be beneficial because claims tend to consolidate and valuation ranges narrow down for various classes even if conflicts are expected because of different interpretations and valuation appraisals of various outcomes. For Norske Skog, in late 2015 and early 2016, there was an attempt (IMO that possibly could have prevented the eventual bankruptcy) for a bond exchange offer but, there were three large groups that manifested counterintuitive behavior (similar to what has happened to WIN) and the attempt failed. It doesn't help when some players benefit even if the total value is reduced. The issue is how to deal with informational asymmetries.

 

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An appeal is an interesting one here. My understanding (and I haven't acquired a law degree since my first post in the thread) is that WIN would have to post security for the judgement for them to appeal. They maybe could do so with the proceeds from the asset sales, but it would definitely add balance sheet stress and uncertainty.

 

Unfortunately (and this is where Aurelius is probably not acting with totally clean hands) I doubt Aurelius will be inclined to settle. Based on my recollection of the Pennzoil debacle, if WIN files for Chp 11 they can appeal without putting up collateral. That is obviously attractive for them, and they could probably do a debt to equity swap for more flexibility, get a bit of a discount on the Uniti lease and give management huge equity incentives. That outcome doesn't seem better from a bondholders perspective, but if Aurelius has a big huge CDS position that changes the incentives on their side of the table as well.

 

Aurelius released a letter today basically daring them to appeal. It isn't the sort of thing you would do if you were planning on having constructive settlement discussions.

 

I think the Uniti debt is potentially attractive. I took a tracker position to keep following it.

 

The incentives for the parties involved seem to point to a WIN Chp 11 filing at the same time they appeal. At that point I would expect Uniti to suspend their dividend and for their bond prices to tumble dramatically. If that happens I think they'll be a buy, as WIN needs the lease and the debt would still be money good even if the lease payments get negotiated down somewhat.

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At that point I would expect Uniti to suspend their dividend and for their bond prices to tumble dramatically. If that happens I think they'll be a buy, as WIN needs the lease and the debt would still be money good even if the lease payments get negotiated down somewhat.

 

Can you elvatorate on why you think their bond prices would tumble after a dividend cut?  In my limited experience investing in this type of debt, it seems like the uncertainty beforehand pushes the bonds down and keeps them in the toilet, but the the dividend cut usually pulls the bonds higher, because more cash  flow is retained to service debt instead of supporting dividend payments to common equity holders.

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At that point I would expect Uniti to suspend their dividend and for their bond prices to tumble dramatically. If that happens I think they'll be a buy, as WIN needs the lease and the debt would still be money good even if the lease payments get negotiated down somewhat.

 

Can you elvatorate on why you think their bond prices would tumble after a dividend cut?  In my limited experience investing in this type of debt, it seems like the uncertainty beforehand pushes the bonds down and keeps them in the toilet, but the the dividend cut usually pulls the bonds higher, because more cash  flow is retained to service debt instead of supporting dividend payments to common equity holders.

 

Sorry, that was poorly worded. The sentence before the ones you quoted talks about a WIN filing. I think a WIN filing would definitely push Uniti bonds down.

 

It would also probably cause Uniti to stop paying dividends. I agree that independently a dividend cut would support the credit because the cash would be on their balance sheet for the bondholders. But if a dividend cut came after a WIN filing I think the uncertainty around the lease would outweigh the savings from the dividend payments. But the savings from dividend suspension and the likelihood that the lease would be renewed with only a slight drop in payments would justify the bonds at par.

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