February 28, 2019 - In last week’s newsletter we focused on the stunning court decision and $310 million judgment in Aurelius Capital’s suit against Windstream that led analysts to predict that Windstream would soon be forced into bankruptcy. It didn’t take long for those predictions to come true; Windstream filed on Monday. This case is attracting a huge amount of attention, not just because of the size of the debt at issue (about $5.6 in funded debt) but because of the number of complex issues it is raising, such as sponsors engaging in “J-Crewing”, investors taking net short positions, the role of CDS, and manufactured defaults, that the fixed income markets having grappling with for the past few years. Over the next few weeks we will be diving in, identifying and addressing many of these issues and what role, if any, they played in Windstream. But, for now, we focus on the basics of the bankruptcy itself, which, like almost everything else about this case, is pretty unusual. But there’s no need to wait long for deeper analysis.
Windstream filed for bankruptcy in White Plains (part of the Southern District of New York, in the same court, and with the same judge, Robert Drain, as Sears), asserting that it was forced to do so because of the $310 million judgment that came as a result of Aurelius’s “predatory” actions. Notably, says LevFin Insights, they did so with no restructuring framework in place, including no Restructuring Support Agreement (RSA) among any of the creditors, highly unusual for a company with so much debt across a multi-tiered capital structure. Nevertheless, the company was able to quickly secure a $1 billion DIP facility led by Citibank and on Tuesday Judge Drain approved the immediate use of $400 million of that amount.
At the DIP hearing lawyers for Windstream told Judge Drain that they would immediately begin working on an “exit arrangement”, commenting that Windstream does not belong in bankruptcy for long. LevFin Insights predicts that the company will focus on quickly getting on board the holders of $1.8 billion in first-lien senior notes and bonds and working its way down the capital structure from there. The battleground, they expect, will be the unsecured bonds, including the disputed ones held by Aurelius and others. An interesting issue that will likely play out is whether Aurelius’s standing should be impacted by its alleged holdings of CDS on Windstream (and, presumably, its net short position). Counsel for the ad hoc group of bondholders argued that Aurelius acted like someone who purchases insurance on a neighbor’s home and then burns it down. But Matt Levine of Bloomberg Opinion suggests that while Aurelius’s CDS play may well result in value destruction, nothing they did was impermissible under the law (and it was inspired by Windstream’s own aggressive moves). It will be interesting to see where Judge Drain lands on this critical issue.