Thread by @sindap

Here is FT news story on Friday's extraordinary SDNY ruling in Windstream/Aurelius bond indenture lawsuit (from me and @BondHack ):
ft.com/content/d1208c…
And here was my preview of the case and on the rise of so-called "net short debt activism": ft.com/content/98fd33… 1/x

Let's take a moment to admire the financial engineering chess match/cage fight between Windstream and Aurelius (2/x)

Windstream, an Arkansas-based telco, in 2015 creates a REIT spin-off NOT with traditional property portfolio but with 300k miles of copper wires and fiber optic cable to take advantage of valuation premium of yield instruments (3/x)

Existing indentures do not allow the new indebtedness associated with the sale-leaseback needed to execute the spin-off so Windstream's clever lawyers create another subsidiary layer to get around the covenant (4/x)

Spin-off works, no problem. No one says anything for two years. But then Aurelius shows up. It buys bonds with $300m of face value, a position big enough to send Windstream a default notice over alleged indebtedness covenant violation. (5/x)

Aurelius has never confirmed, however, it is accepted that its Windstream credit default swap position exceeds its long position (e.g. net short debt activist) hence its strategy to force a technical default. (6/x)

Windstream now reads the indenture again. It finds conditional ability to issue more bonds in the same class Aurelius is in. So it furiously swaps out bondholders in other Windstream series into the series Aurelius hold in order to overturn the default notice Aurelius sent (7/x)

The litigation is then about two issues 1) does the indenture allow for the original 2015 spin-off and sale-leaseback? 2) does the indenture allow for the 2017 exchange offers that overturned the Aurelius default notice? (8/x)

Theoretically, Windstream only needs to win on one of these in order to skate. Alas, on Friday they lost on both with Judge Furman siding with Aurelius calling Windstream's financial engineering "too cute by a half" which the substance-over-form crowd is ecstatic about (9/x)

Speaking of "too cute by a half", the opinion largely ignores the Aurelius CDS overlay, the issue why this case has gotten so much attention and was a Windstream defense. (10/x)

To Aurelius critics, its tactics amount to a stickup. Windstream has struggled but is not deeply distressed. Aurelius shows up out of nowhere and this technical default may push a Windstream Ch 11( refinancing its massive debt load should it be forced to may not be easy). (11/x)

Interestingly, Judge Furman knocks down one of Windstream arguments, that Aurelius arriving on the scene late undermines the hedge fund's case (12/x)

Windstream dispute represents an escalation from Hovnanian et al because the company itself is not benefiting from a hedge fund partnering with it for cheap financing in exchange for default or not default (13/x)

Law aside, it is a little rich to hear some of the notorious hedge funds caught on the other side of this trade lament the thousands of Windstream jobs at risk and the sanctity of the CDS market (14/14)