The Other Shoe Just Dropped on Uniti Group
Background: Windstream was forced to seek protection under a Chapter 11 Bankruptcy filing on February 25th due to its loss in Federal court to bondholder, Aurelius Group. Windstream has 60 days to challenge its Master Lease with Windstream. There is no word thus far on Windstream’s intentions, but there is already enough trouble in the works for Uniti Group that they delayed their Q4 2018 earnings announcement to better understand the lay of the land.
Today, March 18, Uniti filed its 10K after the markets closed. It appears that the lay of the land was not to their liking – or the liking of their auditors, PWC. Here are 8 observations from the 10K backed by specific language in the Uniti 10K’s Item 1A. Risk Factors.
1. Uniti is dependent upon Windstream… and vice versa.
“We are dependent on Windstream Holdings to make payments to us under the Master Lease, and an event that materially and adversely affects Windstream’s business, financial position or results of operations, including as a result of its recent petition for relief under Chapter 11 of the Bankruptcy Code, could materially and adversely affect our business, financial position or results of operations.“
2. Windstream has been struggling.
” There can be no assurance that Windstream will have sufficient assets, income and access to financing to enable it to satisfy its payment and other obligations under the Master Lease. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow, and has had its credit ratings downgraded by nationally recognized credit rating agencies multiple times over the past 12 months. “
3. A Windstream rejection of the Master Lease would set off a chain reaction.
“A rejection by Windstream of the Master Lease or its inability or unwillingness to meet its rent and other obligations under the Master Lease could materially adversely affect our consolidated results of operations, liquidity, and financial condition, including our ability to service debt and pay dividends to our stockholders as required to maintain our status as a REIT. “
4. Windstream Default is even worse.
“In the event of a rejection of the Master Lease, we cannot assure you that we will be able to locate a suitable replacement tenant or if we are successful in locating a replacement tenant, that the rental payments from the new tenant would not be significantly less than the existing rental payments and…would result in an “event of default” under our [Uniti’s] Credit Agreement…”
5. Uniti’s auditor, PWC, is equally dire not even guaranteeing Uniti a year to live.
“There is substantial doubt about our ability to continue as a going concern and in its opinion on our December 31, 2018 financial statements, PricewaterhouseCoopers LLP, our independent registered public accounting firm, expressed substantial doubt as to whether we could continue as a going concern within one year after the date the financial statements are issued as a result of Windstream’s bankruptcy petition and the bankruptcy’s uncertain effects on the Master Lease.”
6. The Uniti Spin Off from Windstream could retroactively fail to qualify as a tax-free transaction thus requiring sizable tax repayments.
“If the Spin-Off, together with certain related transactions, fails to qualify as a tax-free transaction for U.S. federal income tax purposes, both we and Windstream could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify Windstream for material taxes pursuant to indemnification obligations under the tax matters agreement entered into in connection with the Spin-Off.”
7. Uniti already has a lot of debt and has signaled a greater than 50% dividend reduction.
“Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility.”
On a final note, these quotes are pulled from the Statement of Risk which is supposed to highlight what could happen. On page 16 we see the real bottom line…”In light of recent developments and uncertainty surrounding Windstream, we may take measures to conserve cash as we anticipate that it may be difficult for us to access the capital markets at attractive rates until such uncertainty is clarified. Accordingly, we may elect to suspend, delay or reduce success-based capital expenditures and dividend payments to conserve cash and if necessary, we may pay one or more dividends that are required to maintain or REIT status in shares to the extent allowed under IRS REIT rules. If our assumptions are incorrect, we could need additional sources of liquidity to fund our cash needs and cannot assure that we will obtain them.”
The other shoe dropped. It was a size 10K.