The final example (Windstream Services—2017-2019) stems from the September 2017 decision by Aurelius Capital Master, Ltd., a large holder of notes issued by Windstream Services (Windstream), a telecommunications company, to send a notice of default with respect to a covenant breach that allegedly occurred two years earlier. No one else had complained of this possible issue. And if a court agrees a covenant breach occurred, the decision could trigger cross-defaults on about $5.7 billion in debt, and Windstream may be forced into bankruptcy. Why did Aurelius do so? Aurelius is likely not a traditional creditor. Relying on information from industry sources, Windstream proferred the testimony of a banker that Aurelius would profit “more from its CDS position if [Windstream] defaults than if [Windstream] successfully pays off the bond at maturity, creating an incentive for Aurelius to destroy the value to other noteholders.” If true, this would be an example of the weaponization of a technical default. At time of writing, the litigation on this and related issues was pending.
Informational asymmetries can now materially hinder investor decision-making and market efficiency in the context of troubled companies. The true, faux, and technical defaults arising from third party CDS and debt decoupling activities pose especially complex informational and substantive challenges that must be addressed.
2020 will be a very very interesting year!
