On the day they were slated to square-off in court, Windstream Holdings and Uniti Group announced settlement terms in regard to their master lease agreement. With the proposed settlement, Windstream was able to significantly reduce its debt load, while Uniti made concessions that expanded its national fiber footprint.
The two companies also reached an agreement in principal on the settlement of litigation that was related to Windstream's Chapter 11 bankruptcy last year.
Windstream also announced on Monday that it had entered into a plan support agreement (PSA) with its first lien creditors regarding its restructuring plan. Windstream is saddled with between $5.6 billion and $5.8 billion of debt, which Windstream said Monday was now reduced by more than $4 billion. The PSA also included a large reduction in Windstream's annual debt service obligations and access to exit financing to enable Windstream to purse its strategic goals once it emerges from Chapter 11 bankruptcy.
Windstream plans to file its Chapter 11 plan of reorganization, with its proposed new capital structure, with the court for approval with a target of the end of this month. The company expects to emerge from restructuring mid-year, subject to timing of court and regulatory approvals.
In February of 2019, 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 last year's ruling, Windstream filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York that same month. Windstream was paying $54 million per month to Uniti for access to Uniti's network assets.
The master lease with Uniti was set to expire in 2030, and had an annual rent of approximately $659 million. Windstream filed a complaint against Uniti on July 25 that sought to re-characterize its relationship with Uniti from a lease to a financing arrangement.
The agreement in principle on the settlement litigation was supported by lenders that own more than 72% of Windstream's outstanding first lien debt and more than one-third each of its second lien creditors and unsecured note holders, which include affiliates of Elliott Management and other members of the "ad hoc" first lien Windstream creditors group. Elliott Management is Windstream's largest creditor.
Prior to Monday's announcements, Windstream's case against Uniti was slated to go to trial March 2-6 with Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York. The settlement is "subject to negotiation and execution of definitive documentation and certain regulatory approvals and conditions precedent, including bankruptcy court approval and Uniti’s U.S. federal income tax compliance."
Among the settlement terms, Uniti agreed to invest up to $1.75 billion in growth capital improvements, including "long-term fiber" and related assets in certain Windstream CLEC and ILEC properties over the initial term of the new leases.
“Our agreement with Uniti will provide substantial fiber-based network investments for Windstream to significantly expand 1 Gigabit internet service for consumers, positioning the company for sustainable growth and margin expansion upon emergence from restructuring," said Tony Thomas, President and Chief Executive Officer of Windstream, in a statement. "Our goal remains to emerge from restructuring as soon as possible under the best possible terms for Windstream and all our stakeholders.”
For the growth capital improvements that include fiber deployments in CLEC territories, Uniti has the option to require that the deployments be a joint effort with Windstream, with Uniti owning and operating any excess new strands deployed beyond Windstream's forecast. For the CLEC fiber build out, Uniti agreed to fund half of the cost.
On the other side of the settlement coin, Windstream will transfer certain dark fiber indefeasible rights of use (IRU) rights of contract, which currently generate approximately $21 million in annual EBITDA, and its rights to use 1.8 million fiber strand miles currently leased by Windstream that are either unutilized or utilized for the dark fiber IRUs being transferred.
"We are pleased to have achieved a mutually beneficial outcome for both Uniti and Windstream, which has been our stated goal from the beginning, said Uniti CEO and President Kenny Gunderman, in a statement. “This agreement has substantial strategic value for Uniti as it immediately allows the company to expand its national fiber footprint with approximately 450,000 new fiber strand miles and 1.8 million of existing fiber strand miles that are able to be leased by Uniti to a third party. The agreement also provides further expansion in the coming years for additional fiber deployment with our commitment to invest up to $1.75 billion of capital in Uniti-owned, Windstream-leased assets. Approximately 90% of our committed capital as part of the settlement agreement will be used to acquire or build new REIT eligible fiber assets with attractive yields.
"We look forward to a strong working relationship with Windstream as we focus on enhancing Windstream’s competitive position and the network Windstream leases from Uniti."
Uniti will pay out $40 million for certain Windstream-owned fiber assets, including some IRU contracts that generate $8 million of annual EBIDTA and 400,000 fiber strands that serve 4,100 route-miles.
In addition to the $40 million, Uniti will pay Windstream up to $490 million in consideration in quarterly cash installments over five years at an annual interest rate of 9%.
Uniti will also sell stock to certain first lien creditors of Windstream at a price of $6.33 per share, which was Uniti's closing price the day the settlement was reached. The total proceeds from selling the stock was set at $244.5 million. Windstream and Uniti also agreed to split the master lease agreement into structurally similar agreements to govern Windstream's ILEC and CLEC facilities.