A court ruling in favor of Windstream bondholder Aurelius Capital Master Friday could precipitate a Windstream bankruptcy, according to financial experts.

The U.S. Southern District Court of New York upheld Aurelius’ argument that Windstream’s 2015 spin-off of copper and fiber assets into the Uniti Group real estate investment trust (originally known as Communications Sales & Leasing) was prohibited by the indenture on certain notes, Bloomberg reports.

As a result, the court ruled that Aurelius is “entitled to a money judgment in the amount of the notes it holds plus interest.” That figure, the court said, “is $310,459,959.10 with an additional $61,347 per day in interest after July 23, 2018.”

Windstream said it will challenge the verdict.

“We are disappointed in, and frankly surprised by, the ruling and will be taking immediately steps to pursue all available options, including post-trial motions and an appeal,” said Windstream CEO Tony Thomas in a prepared statement.

The Windstream Aurelius Case
Windstream’s total risk is considerably greater than the $310 million plus interest cited in the Aurelius decision because the decision if it stands, could drive other bondholders to pursue similar suits against Windstream. The carrier likely would be unable to pay off all its bondholders, potentially triggering an eventual bankruptcy, although some financial experts said the appeal process could take years.

Telecom bankruptcies were quite common after the tech stock crash of 2000, but bankruptcies of companies such as Windstream that have an incumbent local exchange carrier business are rare. A Morningstar analyst that follows Windstream told Bloomberg he wouldn’t expect a potential Windstream bankruptcy to result in liquidation, however. Instead, he said the company would be more likely to reorganize, with customers seeing no major impact.

The Windstream Aurelius decision is bad news for Uniti Group, which as of November was getting 64% of its revenue from Windstream and which saw its stock value drop considerably after the decision was announced Friday. If the Windstream Aurelius decision stands and Windstream is forced to reorganize, Uniti Group could be forced to accept less favorable terms on the long-term lease payments that Windstream makes to Uniti.

Windstream’s decision to spin off copper and fiber assets into a REIT was driven by the desire to raise capital for network investment. The REIT spinoff created certain tax advantages and at the time, some industry observers expected other carriers to make a similar move.

That hasn’t happened, although Zayo Group has made inquiries to the federal government about the possibility of doing is own spinoff. That prospect now may be less appealing to Zayo. And other carriers also may be glad they didn’t pursue that option.

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