Bankrupt telecom service provider Windstream Holdings filed an adversary suit Thursday in New York bankruptcy court seeking to recharacterize a $650 million-per-year lease agreement with spinoff REIT Uniti Group Inc. as a disguised financing arrangement that siphoned hundreds of millions of dollars away from the debtor.
In the complaint, Windstream said the complex transaction it undertook in 2015 to spin off a large part of its copper wire and fiber optic network assets into a tax-immune real estate investment trust resulted in an unfair arrangement requiring the debtor to pay $650 million in rent obligation each year while the value of the network assets depreciated at an unacceptably rapid rate.
“Calling this arrangement a lease rather than what it actually is, a financing, in and beyond the multiparty context of Chapter 11 gives license to a long-term transfer of billions of dollars of value away from the debtors to the everlasting and irreparable detriment of their creditors,” the complaint said.
In 2015, Windstream and its advisers came up with the plan to create the REIT as a way to allow Windstream to grow while also providing shareholders with a continuing yearly dividend, the complaint said. As a result of the transaction, Uniti was created and it received the bulk of the debtor’s network assets valued at more than $7 billion at the time. In turn, Windstream received a one-time payment from Uniti of $1.035 billion and $2.45 billion in debt securities from Uniti.
Under the terms of the master lease agreement, Windstream has paid $650 million in rent to Uniti per year for the initial 15-year term of the lease agreement. But the complaint said the network assets don’t constitute real estate property as required for Uniti to be an REIT, and the assets’ value will have virtually evaporated by the end of the lease term.
Windstream alleges the master lease’s excessive terms essentially left it on the hook for paying not only rent but also improvements and upgrades to the network assets it was leasing from Uniti and the costs of taxes and licensing, the complaint alleged.
It is seeking to recharacterize the lease as a financing instrument, which would render Uniti’s claims almost entirely unsecured, Windstream said, freeing the debtor from the onerous rent obligations and allowing it to invest in the expansion of its own network.
The complaint also seeks to unwind the network improvement payments made by Windstream for upgrades to Uniti’s assets, saying the debtor was insolvent at the time many of those payments were made.
Representatives for Uniti and Windstream did not immediately respond late Thursday to requests for comment.
Windstream filed for Chapter 11 protection in February after a New York federal judge hit the company with a $310 million judgment, finding that the Uniti spinoff was an event of default under Windstream’s senior note indenture with Aurelius Capital Management.
The complaint was filed on the eve of a hearing in New York bankruptcy court on Windstream’s motion seeking the appointment of a mediator to try to resolve the issues surrounding the Uniti agreement. In that motion and subsequent filings, Windstream and Uniti have said they are both willing to participate in mediation but are not hopeful it will be successful given the distance between their respective positions.
Windstream is represented by Stephen E. Hessler, Marc Kieselstein, Cristine Pirro Schwarzman, James H.M. Sprayregen, Ross M. Kwasteniet, Brad Weiland, Richard U.S. Howell, Yates M. French and Ravi S. Shankar of Kirkland & Ellis LLP.
Uniti is represented by Eli J. Vonnegut, Elliot Moskowitz and Angela M. Libby of Davis Polk & Wardwell LLP.
The adversary case is Windstream Holdings Inc. et al. v. Uniti Group Inc. et al., case number 19-08279, in the U.S. Bankruptcy Court for the Southern District of New York.
The bankruptcy case is In re: Windstream Holdings Inc. et al., case number 19-22312, in the same venue.