Windstream creditors look to halt Uniti lease payments

In the latest cycle of Windstream Holdings ongoing bankruptcy reorganization efforts, two of its creditors asked a judge to order Windstream to stop making lease payments to Uniti Group.

In February, Windstream lost a legal battle with New York hedge fund Aurelius Capital Management over whether Windstream had defaulted on bonds by spinning off Uniti Group four years ago. After that ruling, Windstream filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York the same month.

RELATED: After legal ruling, Windstream files for Chapter 11 bankruptcy

An article on Wednesday by the Arkansas Democrat-Gazette said that UMB Bank and U.S. Bank made a motion that Windstream stop making payments to Uniti. The banks contend that the payments are not lease arrangements, but rather a financing agreement, the latter of which would be barred under bankruptcy proceedings.

The banks said on Friday that Windstream shouldn't be making rent payments to Uniti while it's under Chapter 11 protection, but should instead keep that cash on hand to pay its creditors, according to a Wall Street Journal story (subscription required.)

Since Windstream is "profoundly insolvent," the payments must be "addressed promptly so that the cash outflow to Uniti can stop," the banks said in a court filing on Friday, according to the Arkansas Democrat-Gazette.

Windstream filed an objection to the banks' motion Tuesday night. In the motion, Windstream said resolving the Uniti Master Lease was central to its Chapter 11 case. Among other objections, Windstream said in its filing that the banks' motion was both procedurally and substantively improper.

"Given these legal and practical imperatives, the Motion should be withdrawn, stricken, or, as needed, denied," according to Windstream's filing. "It is an attempt to end-run well-established procedures meant to protect a Chapter 11 debtor’s right to control claims and causes of action of its estate…

"If the Indenture Trustees (the banks) do not withdraw their Motion, and/or if subsequent near-term events do not otherwise render it moot, the Debtors will file as needed a more comprehensive objection."

On Monday, Uniti defended the payments via a press release. Uniti President and CEO Kenny Gunderman said that without access to his company's fiber assets, Windstream would be unable to serve its customers and operate its business.

"This latest effort by out-of-the money junior creditors of Windstream to extract value from Uniti does nothing to change that essential fact," Gunderman said in the press release. "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.

"As we have repeatedly said, we intend to be long-term partners for Windstream and we remain open to working with Windstream and its constituents on mutually beneficial modifications to the lease. We hope that Windstream and its constituents will focus on building a sustainable plan for Windstream’s future rather than pursuing meritless litigation that gambles with the stability of the business and puts at risk the customers it serves.”

As of March, Uniti owns 5.6 million fiber strand miles, approximately 500 wireless towers, and other communications real estate throughout the United States

Windstream is paying $54 million per month to Uniti for access to Uniti's network assets, according to a story last month by Debtwire (subscription required). Debtwire reported that the master lease with Uniti is set to expire in 2030 and has annual rent of $659 million.

Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York scheduled a July 26 hearing to consider the motion by UMB Bank, according to Debtwire.

Citing three unnamed sources, Debtwire reported on June 20 that Windstream had started formal renegotiations with Uniti. In addition to reducing the lease payment, Windstream is also looking at other mutually beneficial arrangements with Uniti, including unused fiber capacity that Windstream could offer to Uniti, or an outright selloff of some fiber to Uniti, according to Debtwire.

Windstream declined to comment on the Debtwire stories. The last public comments Windstream has made on its Chapter 11 proceedings were during its first quarter earnings call on May 15. During the earnings conference call, Windstream CEO Anthony Thomas said the "lease payment could be reduced by 80% or more if the lease were to be renewed in 2030, because of the significant decline in the value of copper facilities," according to a Seeking Alpha transcript.

Citing two sources, Debtwire reported that the actual master reduction could be more along the lines of less than 30%.

With the ongoing master lease negotiations coupled with the July 26 hearing, Windstream has a lot on its plate going forward.

"At the moment their (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 out that 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."