Uniti Group and Windstream Holdings are getting down to the brass tacks of resolving a lease that is crucial to both companies' fortunes.
According to a Thursday story by Bloomberg, several options are on the table as the two companies work to resolve the lease that is at the heart of Windstream filing for bankruptcy earlier this year.
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 the Uniti Group four years ago. As part of that spinoff, Windstream transferred copper-based network assets to Uniti, which Windstream leased back from Uniti to serve its 1.4 million residential and business customers across its 18-state footprint.
After the February ruling, Windstream filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York the same month.
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 an annual rent of $659 million.
Bloomberg reported that Uniti is looking for a mutually beneficial transaction that would include a way for it to make up for lost revenue if it lowers Windstream's annual payment.
Citing unnamed sources, Bloomberg said Windstream could transfer dark fiber assets to Uniti, which in turn would lease them to a third-party. Other options on the table include extending the lease beyond 2030 or an upfront payment by Uniti for the assets it received from Windstream.
Bloomberg said Uniti's credit agreement provided clues to how much of a price break it could give Windstream for the master lease agreement. Uniti could drop the lease payments by $100 million to $150 million before it would violate a requirement to keep its secured leverage ratio under 5 times debt to a measure of earnings, according to Bloomberg.
Last year, Windstream Chief Financial Officer Robert Gunderman estimated his company's dark fiber was worth $100 million to $200 million.
During a first quarter earnings conference call on May 15, 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.
Resolving the lease is key to Windstream's restructuring efforts while an outright rejection of the lease by Windstream would cast doubt on Uniti's solvency, according to a statement earlier this month by Uniti CEO Kenny Gunderman.
"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," Gunderman said in a statement. "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.”
Windstream declined to comment on the Bloomberg story.
RELATED: Windstream creditors look to halt Uniti lease payments
While Windstream continues its negotiations with Uniti, earlier this month two of its creditors asked a judge to order Windstream to stop making lease payments to Uniti.
UMB Bank and U.S. Bank recently 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 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. 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.