Shares of Windstream (WIN) are under pressure after a court ruled that the company defaulted on its bonds in 2015 by spinning off Uniti Group (UNIT). Citing the lack of visibility following the court ruling and an expected lengthy appeal, several Wall Street analysts lowered their ratings for both Windstream and Uniti Group.
COURT RULING: Windstream has announced that a federal judge in the Southern District of New York ruled against one of its subsidiaries, Windstream Services, regarding the 2015 spinoff of certain telecommunications network assets into a real estate investment trust and its agreements with bondholders. The decision arose from challenges by Aurelius Capital Management and U.S. Bank National Association that the spinoff was invalid under the terms of those agreements. The Manhattan court ruled that Windstream defaulted on its bonds in 2015 by spinning off Uniti Group, and dismissed the company's counterclaims against hedge fund Aurelius Capital, awarding the later a judgment of more than $310M, according to Barron's. Citing the federal judge's ruling, Windstream announced it is postponing the release of its fourth quarter and full year 2018 financial results. The company said it is continuing to evaluate its options, including post-trial motions and an appeal, and that it currently expects to release the financial results no later than March 18.
'SIGNIFICANT' RISK: After a Federal District Court Judge ruled that Windstream had violated bond indentures by engaging in the sale and leaseback transaction with Uniti Group, creating an event of default, Morgan Stanley analyst Simon Flannery argued that the consequences of losing this case could represent a "material adverse outcome." Further, the analyst told investors that he sees significant risk for shareholders of Windstream and Uniti given the surprise defeat. Following the news, JPMorgan analyst Philip Cusick downgraded Uniti Group to Underweight from Neutral and lowered his price target on the shares to $16 from $23 as he believes the Windstream legal loss "hamstrings" the company. His peer at Cowen also cut his rating on Uniti to Market Perform from Outperform given the lack of visibility and as he expects a lengthy appeal and possible restructuring. Analyst Gregory Williams also lowered his price target on Uniti shares to $13 from $25. Voicing a similar opinion, Raymond James analyst Frank Louthan downgraded Uniti Group to Market Perform from Strong Buy, saying he expects a long appeals process. Given the uncertainty regarding the outcome of the appeal and how Windstream negotiates with creditors, Louthan does not believe the shares will trade on fundamentals. Additionally, the analyst also downgraded Windstream to Market Perform from Outperform as the negative court ruling leaves a significant amount of uncertainty as to the near- and medium-term trading of the stock. The possibilities include bankruptcy, which would be a negative outcome for all stakeholders, or stay which would likely push shares back in the other direction sharply, he contended.
RULING NEGATIVE FOR FRONTIER, CONSOLIDATED: Arguing that he believes rural incumbent local exchange carriers, or ILECs, tend to trade as a group and are overly correlated with each other regardless of their results, Raymond James' Louthan also downgraded Consolidated Communications (CNSL) to Outperform from Strong Buy and Frontier Communications (FTR) to Market Perform from Outperform. While the analyst does not believe that there is any real connection with the results at Windstream or the court ruling, he sees the potential for the ruling to have a negative impact on Frontier and Consolidated from a trading perspective. Overall, Louthan sees the near-term uncertainty facing the group as the prolonged legal issues of its peer Windstream as likely to continue to be a drag on valuation. The analyst lowered his price target on Consolidated's shares to $12 from $17 and Frontier's to $13 from $17.
PRICE ACTION: In morning trading, shares of Windstream have plunged almost 66% to $1.15, while Uniti's stock has dropped about 35% to $12.99. Also lower, Consolidated Communications has slipped 4.5% to $9.95. Meanwhile, Frontier Communications is fractionally up to $2.66.
Windstream
-2.22 (-65.88%)
Uniti Group
-6.97 (-34.85%)
Consolidated Communications
-0.47 (-4.52%)
Frontier Communications
+ (+0.00%)