Aurelius and Windstream’s game of default chess to be probed
December 16 2017 09:40 PM

Bloomberg/New York

Aurelius Capital Management’s single-handed attempt to drag Windstream Holdings kicking and screaming into default will be scrutinised through legal probes on both sides, shedding more light to the kinds of tactics both companies and hedge funds can wield in a restructuring.
A judge in Manhattan court on Thursday ruled that both parties can investigate actions around the default claim and a recent debt exchange. New York-based Aurelius and the rural telecommunications company have been locked in a dispute over whether Windstream has in fact defaulted on its debt.
A timeline shows the complexity of this high-stakes chess battle, which is playing out move by move both in court and in the marketplace. It’s there that Windstream recently made its latest – and what it hopes will be decisive – move, inducing a majority of its bondholders to agree to waive default claims through a $1.6bn debt exchange.
A Manhattan federal court judge on Thursday ruled that both sides can have until April 30 to probe facts and experts leading up to more litigation on the issues. Judge Jesse Furman also said he may later consider Windstream’s bid to dismiss Aurelius’ claims. 
Credit and restructuring experts have said that as the closely watched drama plays out in court, it may set precedents for whether defaults can be manufactured – as Windstream argues is the case here – in a market where there low interest rates can help companies avoid restructurings.
“Aurelius is definitely trying to manufacture a default,” said Stephen Hazelton, founder of Street Diligence, a research firm that analyses credit agreements. “The question is whether or not their argument is valid.”
Representatives for Windstream and Aurelius declined to comment. Aurelius denied in court filings that there is anything manufactured about its claims.
At the core of the debate is the question of whether Windstream actually defaulted on its debt. Aurelius says it did, through a 2015 spinoff and leaseback of assets in Uniti Group. But Little Rock, Arkansas-based Windstream says the hedge fund is just creating the claim years after the alleged trigger to try and tip it into bankruptcy and benefit its own credit- default-swap position. It has dubbed Aurelius a “rogue noteholder,” claiming that not a single other bondholder has joined the hedge fund’s bid.
US Bank, a trustee for noteholders, filed the suit saying that the Uniti transaction violated an indenture meant to preserve assets for noteholders. The most significant development in the debate so far has been the completion of Windstream’s debt exchange, which it says makes Aurelius’s claims irrelevant. It has already cost the company, which paid $2.50 for every $1,000 in bonds to waive any default claims, $2.25mn to try and mitigate its risk.
Yet Aurelius has continued with its assertions, sending a notice to accelerate the debt even after the exchange was completed. The market, at least in credit-default swaps, reacted.
Aurelius has a formidable reputation in distressed debt, and is known for fighting prolonged battles over arcane legal issues. It was recently dealt a setback in a dispute over the restructuring of Brazilian telecom firm Oi, and has a central position in the fight over Puerto Rico’s debt. Kristin Going, a partner in the bankruptcy practice of law firm Drinker Biddle, said she believes this is a rare instance where a company has successfully diluted a hedge fund of this stature through an exchange offer.
Windstream has accused Aurelius of “gamesmanship,” citing, for example, the hedge fund’s move to rescind a November 27 default notice, completely changing the legal dispute, just 90 minutes before both sides were due to file letters with the court. A public notice of acceleration sent December 7 also “sought to baselessly roil” Windstream since the issue at stake – default – was already being litigated, the company said.
Aurelius’s argument is that the new notes issued in the exchange aren’t valid because an indenture prohibited the new debt. It calls the waivers “purported,” and sticks by its initial claim that the default related to Uniti is still an issue.
“We believe that it will be difficult for Aurelius to convince the judge that there has been a default,” Tom Claps, a litigation analyst at Susquehanna International Group, wrote in an instant message. He said that it was a parent company, not the Windstream Services unit restricted by the indenture, that leased the Uniti assets at issue in Aurelius’s claims. 
According to the US Bank complaint, the Uniti deal involved subsidiaries that were restricted by the indenture.

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