Long ago I warned that the growth the of the CDS (credit default swap) market represented a threat to traditional understandings of how workouts and restructurings are supposed to happen. The recent Windstream decision from the SDNY shows that these basic issues are still around, notwithstanding an intervening financial crisis and resulting regulatory reform.
Windstream is a corporate group in the telecommunications sector. In 2013 it issued some senior unsecured notes due in 2023. Under the indenture for those notes, specific legal entities in the Windstream group agreed not to engage in any sale-leaseback transactions, presumably to maintain legal title to the groups’ assets available for the noteholders to collect against.
But the indenture did not prohibit the creation of new affiliated entities, nor did it bind such new entities to the prohibition on sale-leasebacks. Windstream did exactly that – popping up a new holding company to enter into the lease, and dropping down a new REIT subsidiary to be the owner of the leased assets. A clear end-run around the probable “intent” of the parties (whatever that means in the context of a bond indenture), but not against the express terms of the indenture, which legions of New York Court of Appeals decisions suggest is the only place to look for intent when reading an indenture.
Nonetheless, Aurelius Capital Master, Ltd., a fund managed by Aurelius Capital Management, LP and its affiliates, instructed the indenture trustee to bring suit against Windstream for breaching the terms of the indenture. As the holder of more than 25% of the notes, the Aurelius fund was entitled to give the trustee such instructions.
As many Slips readers will already appreciate, Aurelius is well-known in the restructuring community for its fondness for a robust sort of litigation. To put it mildly. And it is alleged that Aurelius has fully hedged its Windstream position with CDS, meaning that it can afford to be quite aggressive, because damage to Windstream will actually increase the value of the CDS position.
I’ll try to condense this as much as possible, but readers can see that we are headed into one of my longest posts in a while …