October 3, 2017 - An LSTA webcast last week (“Out of Court Restructurings Through Credit Agreement Buckets”) detailed situations in which borrowers used credit agreement or indenture buckets to facilitate creative restructurings that may not have been aligned with lenders’ expectations. We noted then that the panel was timely and events this week certainly confirmed that view. As reported by the WSJ, cable company Windstream Services (“Services”) filed suit against Aurelius Capital Management to prevent Aurelius from declaring a default on its bonds in connection with a 2015 spinoff of certain of its assets to Uniti Corp. Aurelius sent Services a notice of default, claiming that the 2015 transaction was a sale-leaseback which violated a covenant in Services’ bond indenture. Services asserts that the spinoff transaction is in compliance with the indenture. The stakes are very high because all of Services’ $3 billion in bonds are subject to the same prohibition on sale-leasebacks and a ruling against them might very possibly lead to a Chapter 11 filing.
This case raises precisely the type of issue that the webinar addressed. (In fact, in a flash of prescience, Windstream was specifically discussed.) In April 2015, Services spun off most of its assets to a separate entity called Uniti. It also contributed over $1 billion in cash to Uniti and assumed $2.5 billion in Uniti debt. It then spun off an 80.4% stake in Uniti to its parent, Windstream Holdings (Holdings), which then distributed the stock pro rata to its shareholders. After the spinoff, Holdings entered into lease agreements with Uniti for land and other Uniti assets.
Like many of the cases discussed in the webinar, the issue will likely be decided by a court’s interpretation of “the words on the page”. In this case, those words are found in Section 4.19 of the indenture which prohibits “Sale and Leaseback Transactions on behalf of Restricted Subsidiaries”. While there is no dispute that Services would have been prohibited from directly entering into a sale-leaseback with Uniti, it asserts that the spinoff to Uniti and lease to Holdings is entirely permissible under Section 4.19 because the entity that made the transfer (Services) and the entity that entered into the leases (Holdings) were different (and, indeed, Holdings is not even subject to the restrictions in the indenture). The pertinent sections of the indenture are contained in Section III of the complaint, beginning on page 16.
Does this violate the spirit of the agreement? Does it matter? In its complaint Services notes that the indenture was a “carefully negotiated document between sophisticated parties represented by experienced counsel” and points out that the indenture includes a “precise definition of what constitutes a “Sale and Leaseback Transaction”. The bottom line: As the panelists last week stressed, the words in a contract matter and courts are likely to give meaning to the words before them whether or not they reflect the original expectations of lenders. The related slide presentation is available here.
