Tue 07/24/2018 18:28 PM
Judge Jesse Furman presided over the second day of the Windstream sale-leaseback and note exchange trial today, hearing the testimony of Windstream CFO Robert Gunderman and Aurelius Capital Management LP Managing Director Dennis Prieto. The testimony of Saul Solomon, Windstream’s accounting expert, was offered into evidence by affidavit, and Solomon did not present live testimony. The witnesses’ affidavits have not been filed publicly on the docket.
The trial will resume tomorrow, Wednesday, July 25, at 9:30 a.m. ET with the testimony of Stephen Cheeseman, a managing director at Citigroup Global Markets who led the team that advised Windstream on the November 2017 note exchanges.
Robert Gunderman
Spinoff Transaction
Windstream CFO and treasurer Robert Gunderman was the first witness on the stand today. He was first cross-examined by Edward Friedman of Friedman Kaplan for U.S. Bank on matters relating to the 2015 Uniti spinoff. Gunderman said that he testified in the Kentucky regulatory proceedings in the course of the spinoff and noted that in the Kentucky proceedings, he “oversimplified” some of his original answers. He also acknowledged that having Holdings as the master lease lessee allowed Windstream to have maximum flexibility to address lease obligations and that regardless of whether Holdings was the lessee, the transferor subsidiaries are the only Windstream entities with the regulatory authority to use the leased property.
Gunderman agreed with Friedman’s statement that unless the master lease rent payments are made, the subsidiaries are at risk of losing the use of the properties. He said that if the subsidiaries did not use their money to pay the lease rent, they would be at default under the lease and Uniti would have the ability to exercise its rights under the lease. In response to a question from Judge Furman as to why Uniti would have preferred that the transferor subsidiaries (rather than Holdings) have signed the lease, Gunderman explained that having Holdings sign the master lease resulted in the obligations to Uniti under the lease being structurally subordinated to debt obligations at Services.
Judge Furman noted that in Gunderman’s affidavit, Gunderman described certain reasons for having Holdings sign the master lease. “Was one of the reasons to avoid a default or breach of the indenture agreement?” asked the judge. Gunderman said that avoidance of default “was not what we were contemplating at that time.” Judge Furman then asked, “Was there discussion about the need to have Holdings be the sole signatory to avoid a breach of the indenture?” Gunderman said that Windstream had considered the need to have the lease be in compliance with the indenture, “so I would say yes.”
Under redirect examination by Hariklia Karis of Kirkland & Ellis for Windstream, Gunderman said that he relied on general counsel Kristi Moody for purposes of understanding the 6.375% notes indenture. He also said that his function with respect to the indenture was to ensure that all the material financial terms and covenants were within the boundaries of what Windstream offers to its investors and to stay in compliance with all Windstream’s material agreements. Gunderman stated that the aggregate benefits to Windstream from the spinoff were to improve the debt profile and leverage ratios of the company. He said that on a total leverage basis, the leverage ratio decreased to 3.41x from 3.79 as a result of the spinoff and that the transaction lowered debt more than it lowered revenue and earnings, accounting for the $650 million annual rent payment.
In response to further questioning from Judge Furman, Gunderman explained that the benefit to Services of having Holdings sign the master lease is that Holdings sits outside the restricted debt group at Services. Gunderman also testified that U.S. Bank had issued and authenticated the additional 6.375% notes issued pursuant to the supplemental indenture in the November exchange.
Under re-cross-examination by Friedman, Gunderman conceded that section 2.10 of the third supplemental indenture provides that U.S. Bank as trustee makes no representations as to the issuance’s validity. He further agreed with Friedman that the market value of the assets that were spun off to Uniti in 2015 was approximately $7.5 billion. Friedman pointed out that there were certain other intangible assets such as easements, where the transferor subsidiaries were retaining legal title. However, Gunderman could not recall if the easements were part of the fair-market value. Further, Gunderman agreed that for 2016, compared with 2014, Windstream’s book interest expense has increased by approximately $300 million.
Additionally, Friedman pointed out that when the master lease was signed, the rent obligations had a present value that was not included in Windstream’s debt and leverage ratios, and Gunderman agreed.
Note Exchange
Under cross-examination by Lawrence Robbins of Robbins, Russell, Englert, Orseck, Untereiner & Sauber for Aurelius, Gunderman said he was the CFO at the time of the November 2017 consent and exchange and agreed that he understands that an indenture is a contract that prescribes the rights and obligations of the parties. He agreed that potential lenders rely on the terms of those indentures in deciding whether to purchase a company’s debt. Robbins asked if the company would have breached the leverage covenant in the 6.375% notes indenture if the Uniti sale-leaseback transaction violated the indenture, and Gunderman testified that he was not sure because he has not done the calculations. Gunderman also testified that there are some exceptions where the company is allowed to engage in a particular type of borrowing if it fits within an exception, for example, the permitted refinancing indebtedness exception.
Robbins asked Gunderman whether in concluding that the note exchange met the indenture covenants, he had reviewed subsection 1 of the definition of “permitted refinancing indebtedness” under the indenture, and Gunderman said that he had read this section. Robbins pointed out that there was an approximately $40 million increase in indebtedness and that at least some of that increase was the result of exchange ratios that the company used in the November note exchange. Gunderman agreed that Windstream had issued a principal amount of new notes that was higher than the principal amount of old notes being refinanced. He also agreed that there were secured notes issued in the exchange.
Robbins then asked Gunderman about Gunderman’s testimony that in the exchange, the new notes were “basically the economic equivalent of the old notes, in that once you adjust for maturity - the longer maturity and the lower coupon - what the old noteholders got was in value the same as what they gave up.” Gunderman agreed. Robbins asked whether Gunderman would agree that if there was an excess of value, that excess would constitute a premium paid on the transaction, noting that Gunderman has stated that he does not believe an excess was paid. Gunderman agreed with both statements and also conceded that he had stated that no premium was paid on the refinancing.
Robbins turned to the minimum issuance condition in the exchange, noting that one of the conditions for the exchange was that the company receive consents from holders of a majority of then-outstanding 6.375% notes. With respect to the word outstanding, Robbins said that “what that means is that a note … has already been authenticated and issued to the public.” Gunderman agreed. Robbins pointed out that the company then later sought to change the condition but asserted that the company did not circulate this new language to bondholders either through Global Bondholder Services or through press releases.
Gunderman agreed with Robbins that as of Nov. 6, 2017, the notes in the 6.375% series that were actually outstanding were the ones already held by existing noteholders. “It seems reasonable to conclude that,” said Gunderman.
On redirect, Gunderman testified that to this day, no other parties other than Aurelius have complained about not receiving proper notice with respect to the issuance of the new 6.375% notes under the exchange offer. He further stated that no party other than Aurelius has argued that Windstream did not satisfy the conditions to the new indebtedness. According to Gunderman, the bondholders of Windstream Services’ notes are “very sophisticated” and closely follow press releases. He also said that he was discussing the terms of the exchange with investors.
Dennis Prieto
Prior to the testimony of Aurelius Managing Director Dennis Prieto, counsel to Aurelius and Windstream walked through the ground rules for the cross-examination. Counsel to Windstream, Richard Godfrey of Kirkland & Ellis, gave assurance that he would not seek to incite the witness to breach attorney-client privilege in his answers. Judge Furman decided from the bench to allow counsel to Windstream to engage in questioning the witness regarding Aurelius’ October and November trading activity related to Windstream’s bonds. Counsel to Aurelius brought to the attention of the court that the concerned parties had previously agreed that any and all settlement discussions would not be used in the litigation.
In the cross-examination of Prieto, Godfrey challenged Prieto’s assertion that Aurelius was not made aware of any amendments to the exchange and consent process announced by Windstream on Oct. 18, 2017. He pointed Prieto to the third paragraph of a press release issued by Windstream on Nov. 1 that included a statement that Windstream was revising the terms of the announced transactions, and Prieto affirmed that Aurelius had seen the Nov. 1 press release at or shortly after the time it was released. Godfrey asked Prieto if at any time between Oct. 18 and Nov. 7 (the date of the early settlement of Windstream’s exchange offers) anyone on the Aurelius team picked up the phone to call Windstream or the Depository Trust Co. through which the bonds were being offered. Prieto said that he was unable to recall any attempts by the Aurelius team to directly contact either of those parties.
In his next line of questioning, Godfrey brought to the attention of the court three letters addressed to “fellow noteholders” of Windstream’s bonds that were disseminated through “publications that the noteholders typically read,” according to Prieto’s testimony, and three directions to U.S. Bank as trustee on the notes related to the certification and authenticity of the notes. Godfrey asked if these six communications represented the “sum total of what Aurelius did to challenge the first exchange offer and consent solicitation and new notes,” to which Prieto responded that he did not “have recollection of anything beyond that.” Prieto conceded that Aurelius had not sought an injunction in court to halt the exchange.
After establishing that Aurelius has never sued U.S. Bank as the trustee for failing to follow its direction not to authenticate the new 6.375% notes through the Oct. 18 exchange, Godfrey then turned to Aurelius’ Nov. 27 notice of event of default, which Prieto confirmed Aurelius had since rescinded.
Finally, Godfrey questioned Prieto on Aurelius’ historical holdings of Windstream’s notes. Prieto affirmed that as of Sept. 5, Aurelius held roughly $189 million face amount of Windstream’s notes due August 2023, that by Sept. 21 Aurelius’ position had grown to roughly $224 million face amount, and that by Nov. 7 Aurelius held roughly $299 million face amount of the August 2023 notes. Godfrey asked if at any time between Sept. 5 and Nov. 7, while it was disseminating letters discussing the negative aspects of the proposed exchange and consent processes to noteholders, Aurelius informed its fellow noteholders of its increasing stake in the August 2023 notes, and Prieto said that it had not.
Prieto also clarified that Aurelius held only a nominal amount of Windstream’s 2020, 2021 and 2022 notes and that he did not believe Aurelius acquired any additional August 2023 notes after Nov. 7.
Prieto also responded to questions from Godfrey asserting that he had only met Aurelius’ expert witness on the exchange offer, Faten Sabry, face to face on one occasion and that he had only had “maybe a couple” of phone conversations. During those discussions, Prieto said, Fabry’s team had asked Aurelius to provide sell-side reports, ading that Sabry had “maybe, indirectly” asked to see Aurelius’ trading data. Prior to Prieto’s testimony, Aurelius’ counsel clarified that Windstream counsel would be able to ask Sabry directly any questions related to whether Aurelius’ trading data was reviewed as part of the research into the formation of Fabry’s expert opinion related to the litigation.
During redirect, Robbins as counsel to Aurelius referred back to the Nov. 1 Windstream press release referenced by Godfrey, asking Prieto if there is anything in the release “that alerts anyone” that the minimum issuance condition had been changed and in what way it had been changed. Prieto said that he does not believe the release brings forward these issues, adding that he thought the reference in paragraph three of that release to the company’s revising of terms referred to “other notes series.”