Event Publicly Available Information:
On April 24, 2015, Windstream completed a transaction in which it contributed certain telecommunications network assets, including its fiber and copper networks and other real estate, into a real estate investment trust Uniti Group, Inc. (“Uniti”) (formerly Communications Sales & Leasing, Inc.). The transaction also included substantially all of Windstream’s consumer CLEC business. According to Windstream’s 2016 Form 10-K, the contributed telecommunications network assets had a net book value of approximately $2.5 billion at the time of the transaction. In exchange for the telecommunications network assets and the consumer CLEC business Windstream received: (i) all of the common stock of Uniti, of which 80.4% percent of the shares were distributed on a pro rata basis to Windstream’s stockholders, (ii) a cash payment in the amount of $1.035 billion and (iii) a distribution of approximately $2.5 billion of debt securities issued by Uniti.
As part of the April 24, 2015 transaction, Windstream Holdings, the parent of Windstream, entered into a long-term triple-net master lease with the transferee of Windstream’s assets to lease back the telecommunications network assets. Windstream stated in its 2016 10-K, “As the master lease was entered into by Windstream Holdings for the direct benefit of Windstream Services and its subsidiaries, Windstream Services is also deemed to have continuing involvement due to retaining its regulatory obligations associated with operating the telecommunications network assets.” The master lease provides for an annual rent of $650 million paid in equal monthly installments in advance and is fixed for the first three years. Thereafter, rent increases on an annual basis at a base rent escalator of 0.5%. Windstream stated in its 2016 10-K that “[a]t inception of the master lease, we recorded a long-term lease obligation of approximately $5.1 billion equal to the sum of the minimum future annual lease payments over the 15-year lease term discounted to the present value based on Windstream Services’ incremental borrowing rate.”
Indenture Violations:
The April 2015 transaction violates Windstream’s Indenture, dated as of January 23, 2013, pursuant to which it issued the 6 3/8% Senior Notes due 2023. Windstream’s incurrence of indebtedness under the master lease caused it to fail the Consolidated Leverage Ratio test under Section 4.09 of the Indenture; therefore, precluding Windstream from making restricted payments using the capacity provided for in Section 4.07 of the Indenture. Moreover, because the April 2015 transaction constituted a sale leaseback transaction, Section 4.19(iii) of the Indenture required Windstream to apply the proceeds of the transaction in compliance with Section 4.10 of the Indenture. Any excess consideration from the 2015 transaction, after payment of debt under Windstream’s credit agreement and the purchase of replacement assets, was not, and continues not to be, used to repurchase its indebtedness, including the 6 3/8% Senior Notes within 366 days after the April 2015 transaction in violation of Section 4.10 of the Indenture. The failure to use excess cash to repurchase 6 3/8% Senior Notes and other indebtedness when required under Section 4.10 constitutes a Failure to Pay Credit Event.
2016 10-K
https://www.sec.gov/Archives/edgar/data/1282266/000119312513020891/d472206dex41.htm
Form 8-K