the windstream bankruptcy...financial engineering and the creation of cs&l 2014-2015: windstream...
TRANSCRIPT
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The Windstream Bankruptcy: The Future for CWA-represented
Employees
CWA Telecommunications
and Technologies
March 2019
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Windstream Growth Debt Driven
High level of debt (measured by debt/EBITDA).
– Windstream = x5.5 in 2017
– AT&T = x3.6 (after Time Warner purchase)
– Verizon = x2.6
– Frontier = x5.0
– CenturyLink = x6.2
Debt-driven growth squeezes all aspects of the
company.
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Financial Engineering and the Creation of CS&L
2014-2015: Windstream reorganized into two companies –
Windstream Services and Communications, Sales & Leasing
(now Uniti Fiber)
Goals was to lower tax rate for shareholders b/c CS&L
organized as a real estate investment trust (REIT) – profits at
CS&L pass through to shareholders and are not taxed at
company level
CWA opposed the transaction for multiple reasons
– REIT plant and equipment outside regulatory arena
– REIT organization led to concerns about safety of our members
– Financial concerns: uncertain effect on cash flow
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Aurelius Capital Management
“Vulture fund” that buys distressed debt and demands full
payment at redemption
– Argentina
– Puerto Rico
Saw an opportunity at Windstream in the 2013 Indenture
(6.375% notes)
– Debt covenant prevented sale/leasebacks AND CS&L was leasing
back the assets to WIN
– Later argument: debt exchange impermissible b/c higher debt
September 22, 2017: notice of default
December 7, 2017: notice of acceleration – principal + interest
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Windstream Counter Arguments
WIN argued Aurelius a “rogue noteholder”
– Had purchased Credit Default Swaps in hope of
default
– Other bondholders agreed to exchange debt
WIN also argue that Services – the note
issuer – not a party to the lease with CS&L
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Creditor v. Creditor
Debt swap of 2013 notes
– Elliott Management, Blue Mountain Capital, JP Morgan Asset
Management
– Majority of noteholders (61%) agreed to extend from 2023 to 2025
Debt swap of notes due 2020
– Citadel, Elliott Management, Western Asset Management, Loomis
Sayles
– Junior debt transformed into senior debt
– Paying 10.5% vs 7.75%
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February 15 Decision
Judge Jesse Furman agreed with Aurelius
– The legal fiction of Windstream Services not a
party to the lease was “too cute by half”
– The REIT and leasing of plant & equipment
violated debt covenant
– The debt exchanges in 2018 violated debt
covenant
Aurelius awarded $310 million
Windstream promised an appeal
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February 25 Bankruptcy
Voluntary Chapter 11 reorganization – “Windstream did not arrive in chapter 11 due to operation failures
and, currently, does not anticipate the need to restructure material
operational obligations. Instead … Windstream hopes and
anticipates that its operations will continue uninterrupted and its
employees will be able to continue to focus on providing best-in-
class service to all of Windstream’s valued customers…. The
primary aim of these chapter 11 cases is to serve as a foundation
for a financial restructuring necessitated by an adverse ruling in
the United States District Court for the Southern District of New
York by Judge Jesse Furman, which found a default under an
indenture governing certain of Windstream’s unsecured notes….
Windstream hopes to protect its business as a going concern,
ensure long-term financial stability, and secure a sustainable go-
forward capital structure.” [Declaration of Tony Thomas. p. 3] 8
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Windstream Reasoning for Reorganization
Appeal would require that Company post a
bond of $310 million
Court decision triggered default on other
Windstream debt
– Holders of a majority of senior notes and the
revolver needed to waive a default
– Uncertainty whether Windstream liable for more
than just Aurelius judgement – potentially up to
$1.5 billion
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CWA Actions
T&T followed court case from the beginning
– Team of Lisa Bolton / Ken Saether / Tom Smith /
Pat Shea / Tony Daley
Statement to CWA locals after February 15
Engagement of outside bankruptcy attorneys
Outreach to CWA locals
Assembling of claims
Petition to sit on unsecured creditors’
committee
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Key Filings to Date
2/25: DIP Motion Introduced
– $1 billion commitment from JP Morgan Chase
– 2/28: Court granted access of first $400 million
2/25: Declaration of Tony Thomas
2/28: Interim Order Authorizing Debtors to
Pay Pre-Petition Employee Wages, Salaries,
Other Compensation, and Reimbursable
Employees Expenses and to Continue
Employee Benefits Program 11
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Cohen Weiss & Simon
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Bankruptcy Docket
http://www.kccllc.net/windstream/
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http://www.kccllc.net/windstream/
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APPENDIX
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Financial Metrics – 2010-17
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$ mi l l ion 2010 2011 2012 2013 2014 2015 2016 2017 2010-17
Revenue $3,710.7 $4,279.6 $6,139.5 $5,988.1 $5,829.5 $5,765.3 $5,387.0 $5,852.9 $37,099.7
EBITDA $1,812.2 $1,881.5 $2,274.1 $2,389.3 $1,969.8 $1,991.6 $1,813.0 $1,928.1 $14,131.5
Net income $312.7 $169.5 $168.0 $241.0 -$39.5 $27.4 -$383.5 -$2,116.6 $495.6
Total Debt $7,437.1 $9,269.6 $9,086.0 $8,779.0 $8,722.2 $10,375.3 $9,899.5 $10,694.1
Debt/EBITDA 4.1 4.9 4.0 3.7 4.4 5.2 5.5 5.5
Dividends $464.6 $509.6 $588.0 $593.6 $602.2 $369.2 $58.6 $64.4 $3,250.2
Stock Buybacks $0.0 $0.0 $0.0 $0.0 $0.0 $46.2 $28.9 $19.0 $94.1
Sourcxe: Capita l IQ
Windstream Communications
Financial Information 2010-2017
Dividends + Buybacks as
Percentage Net Income 148.58% 300.65% 350.00% 246.31% n/a 1516.06% n/a 674.80%n/a
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Financial Metrics - 2018
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$ mi l l ion 1Q2018 2Q2018 3Q2018 1-3Q2018
Revenue $1,454.3 $1,444.4 $1,420.6 $4,319.3
EBITDA $147.0 $163.2 $148.8 $459.0
Net income -$121.4 -$93.7 $41.3 -$173.8
Tota l Debt $10,743.2 $10,631.7 $10,435.3
Debt/EBITDA (annual ized) 18.3 16.3 17.5
Dividends $0.0 $0.0 $0.0 $0.0
Stock Buybacks $0.0 $0.0 $0.0 $0.0
Source: Capita l IQ
Dividends + Buybacks as
Percentage Net Income 0.00% 0.00% 0.00% 0.00%
Windstream Communications
Financial Information 2018
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CEO Pay
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A B C D E F G H I
Salary All other
Value
Realized
on Time-
Vested
Stock
Non-equity
Incentive Plan
Compensation
Value
Realized
On
Exercise
of Options
Value Realized
on
Performance-
Vested Stock
2017 A. Thomas $3,960,643 $1,000,000 $85,659 $839,652 $1,195,680 $0 $839,652
2016 A. Thomas $3,215,471 $1,000,000 $81,718 $513,751 $1,106,250 $0 $513,752
2015 A. Thomas $2,796,831 $1,000,000 $59,571 $243,630 $1,250,000 $0 $243,630
2014 A. Thomas $1,537,809 $538,461 $61,843 $405,053 $127,400 $0 $405,053
2013 J.R. Gardner $4,895,380 $1,000,000 $90,840 $311,862 $969,435 $0 $2,523,243
2012 J.R. Gardner $6,620,983 $998,615 $117,107 $471,929 $1,215,000 $0 $3,818,332
2011 J.R. Gardner $7,677,182 $991,000 $132,747 $529,671 $1,738,246 $0 $4,285,518
NOTE
Performance Pay
Windstream CEO Compensation
Gardner resigned December 2014 and was replaced by Thomas. He received $6,437,867 in compensation in
2014. He received $3,000,000 severance in 2015.
Source: SEC Form 14A, various years
Time-Based Pay
CEOYear
Total Pay
Received
by CEO
(D+E+F+G+
H+I)
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Share Price
18
185.46%
145.76%
80.21%
-26.00%
-97.03% -99.47%
Verizon S&P 500 AT&T CTL FTR WIN
Change in Telecom Share Prices 1/1/2010 to 2/28/2019
Source: Yahoo Finance, accessed March 1, 2019