Last October, Euromoney wrote about the legal battle between US rural internet services provider Windstream and activist hedge fund Aurelius Capital Management.
The row concerned a sale leaseback of the former’s fibre optic cable network in 2015 which Aurelius claimed violated debt terms in place to preserve assets for noteholders. The hedge fund had built up a large short position in the debt in the expectation that the sale leaseback would trigger a CDS event of default.
On Friday February 15, Aurelius won the case and Windstream was ordered to pay $310 million plus interest to the hedge fund. As we have previously pointed out, the latter’s victory could now trigger cross defaults on $5.7 billion of Windstream debt. The firm is, unsurprisingly, appealing the decision.
Now, activist hedge funds are not, admittedly, known for their restraint, but Aurelius’s public reaction to the decision has taken the market aback. The firm is run by Mark Brodsky, alumni of Elliott Management, who has a fearsome reputation in the business following a key role in bondholders’ legal battles with Argentina and Puerto Rico.
“We take no pleasure in Windstream’s resulting financial predicament,” the firm declared, in an aggressive press statement that very strongly suggests the opposite. Criticizing Windstream for playing fast and loose with its investors, it then relished the prospect of the appeal.
“This is welcome news for our fund, as it will require Windstream to post a surety bond exceeding $300 million,” it crowed. “That surety bond will pay in full the notes our fund owns when Windstream loses the appeal. We are happy to take the surety company’s credit over Windstream’s.”
Then, just for good measure, it had a go at other noteholders who had previously consented to a $1.6 billion debt exchange that was undertaken to dilute Aurelius’s position. “To noteholders who chose to play the company’s game even after it had broken its promise, we wish you luck with your exchange notes. Between their dubious status and their OID risk in bankruptcy, we suspect you will need it.”
Aurelius’s position will surprise no one, but for them to state it so publicly is quite shocking. Absent the company winning its appeal, the most likely outcome for Windstream is bankruptcy. This will cause a lot of people to lose their jobs.
Debt activism is a dirty business, but maybe a touch more humility in victory – at least in public – on Aurelius’s part wouldn’t go amiss.
