LFI: Bankruptcy Insight: Windstream has difficult task building consensus toward consensual chapter 11 plan

The Windstream debtors are facing a considerable degree of difficulty on the road to plan confirmation and emergence because, simply put, there was no formal restructuring framework in place upon the company’s emergency filing two days ago and one doesn’t exist today.

Indeed, there is virtually no chance that the Little Rock, Ark.-based rural telecommunications company would have initiated its chapter 11 cases in the first place if not for the recent SDNY federal court ruling in favor of unsecured noteholder Aurelius Capital Management that Windstream violated certain unsecured notes indentures after spinning off its Uniti Group business in April 2015, which led the debtors to an immediate debt acceleration, liquidity crunch and need for bankruptcy protection.

That reality was freely and openly acknowledged by debtors’ counsel on the record at yesterday’s first-day hearing in White Plains, N.Y., as well as other parties in the courtroom.

That said, the fact of the matter is that it is highly unusual for a company with around $5.6 billion in funded debt across a multi-tiered capital structure, comprising around $800 million in first-lien revolving loan obligations, around $1.8 billion in two tranches first-lien term loan obligations and notes (including $100 million of secured notes issued by an indirect subsidiary of Windstream Holdings) and around $2.9 billion of second-lien secured notes and unsecured notes, to enter chapter 11 without a plan or restructuring support agreement (RSA) in place, but that is exactly what Windstream faces today.

The debtors’ attorneys stated yesterday that the company’s general chapter 11 objectives are to utilize the breathing spell afforded debtors in bankruptcy, during which time creditors such as Aurelius are temporarily enjoined from taking collection action on its $310 million money judgment obtained in the SDNY litigation; to build and reach quick consensus on plan terms; obtain substantial DIP financing, which was needed as a result of the debtors’ inability to access their prepetition credit facilities because of the SDNY ruling and cross-defaults that followed; and then emerge with uninterrupted business operations.

The question is how exactly will Windstream proceed toward a confirmable plan and how easy will it be.

In the first instance, taking a page from the playbook of the majority of recent jumbo size chapter 11 cases, the debtors are likely to seek to reach agreed-up plan terms with their first-lien creditors in order to lock-up those parties’ support of a plan process through execution of an RSA. 

Any such RSA, which could also include as a signatory any other key creditor or creditor group, would set forth the general framework of a chapter 11 plan, proposed treatment and recoveries for different classes of creditors and interest holders, and a proposed post-effective date capital structure inclusive of any proposed exit financing.

If Windstream is successful in obtaining its first-lien creditors’ firm support of a chapter 11 path, then it can build on that by seeking to add other parties in the capital structure, including second-lien parties and perhaps even unsecured bondholders and any official committee of unsecured creditors (UCC) formed in the cases.

With no proposed class treatment provisions yet determined, specific areas of potential dispute are as-yet unknown but it does not take a crystal ball to see that a likely battleground will be proposed treatment of unsecured bondholder claims, including the 2023 6 3/8 unsecured noteholders led by Aurelius.

If the debtors are unable to obtain the consent of the unsecured bondholders, including Aurelius with respect to the allowed amount and treatment of those claims, litigation over the amount of those claims and over the debtors’ ability to confirm a plan over the bondholder objections will likely be the fulcrum issue in the cases.

Aurelius has not taken a formal position as to Windstream’s chapter 11 filings and didn’t appear at yesterday’s hearing. A response of some kind is likely forthcoming at some point.

One common basis for such a dispute in a reorganization scenario (which these cases appear to be) could be over valuation if the unsecured bondholders, as a group or individually, contend that the debtors are materially undervaluing their enterprise and therefore depriving lower priority unsecured noteholders of a recovery in the cases while higher priority secured parties receive more fulsome recoveries.

Similar arguments would also likely be made by any UCC formed in the cases, which group will almost certainly include the indenture trustees for the unsecured bonds.

Once formed, the UCC will also undertake a perfection analysis as to the validity and priority of the debtors’ prepetition secured debt as well as an investigation of the facts and circumstances that led Windstream into bankruptcy, the results of which will impact the ease and speed of the chapter 11 cases, as such investigations always do.

The role - and in fact the statutory duty - of any UCC is to push debtors hard to maximize recoveries for the benefit of general unsecured creditors, a result that is often at odds with debtor’s plans to serve the needs of their secured parties that are funding the cases via DIP financing and consensual use of cash collateral.

A colorable UCC lien challenge (or other lender liability-based) lawsuit, or at minimum the threat of one, is a powerful tool that can help unsecured creditors extract a more favorable settlement in a chapter 11 case, especially one where funds are scarce.

Despite the negative public relations shade inevitably caused by the emergency chapter 11 filings, one factor working in Windstream’s favor as a positive harbinger of things to come in the cases is the apparent ease in which the debtors were able to cobble together a whopping $1 billion in DIP financing in what amounted to slightly more than a single week following the SDNY ruling, which relief was approved without issue yesterday on an interim basis.

In that regard, the debtors characterized the interest of its various key stakeholders in providing DIP financing as “extraordinary” and “a strong indication of the commitment and investment the company’s creditors have in supporting the Windstream’s restructuring.”

Those words, as well as the results obtained yesterday, are indeed a promising start for Windstream. 

However, the debtors cannot and likely are not taking anything for granted with respect to building consensus at this early juncture, and clearly have their work cut out for them in gaining the unsecured bondholders as plan support parties. (Access the full docket here.) 

The debtors are advised by Kirkland & Ellis, as counsel; PJT Partners, as investment banker; and Alvarez & Marsal North America, as restructuring advisor.

The ad hoc group of first-lien lenders is advised by Paul Weiss Rifkind Wharton & Garrison, as counsel.

The ad hoc group of second-lien noteholders is advised by Milbank, as counsel.

Citibank is advised by Davis Polk & Wardwell, as counsel.

JPMorgan Chase Bank is advised by Simpson Thacher & Bartlett, as counsel.

The Midwest noteholder group is advised by Shearman & Sterling, as counsel.

Wilmington Trust is advised by Reed Smith, as counsel.

The debtors’ cases are captioned In re Windstream Holdings, Inc., et al. and are being jointly administered under case no. 19-22312 (RDD) by the U.S. Bankruptcy Court for the Southern District of New York.

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