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Uniti Group Inc. is dangling the prospect of lower payments for Windstream Holdings Inc. on the disputed lease that helped trigger its bankruptcy in return for getting some surplus Windstream assets, according to people with knowledge of the matter.

Talks are underway, with Uniti envisioning a mutually beneficial transaction that includes a way to make up for the revenue it would lose if it reduces Windstream's $650 million annual payments, the people said.

Concessions could include transferring fiber-network assets that Windstream isn't using to Uniti, which could then lease those lines to a third party, said the people, who asked not to be identified discussing confidential negotiations. A deal might also include an upfront payment by Uniti for the transferred assets or extending the lease beyond its 2030 expiration, according to the people.

Uniti has warned that outright rejection of the lease by Windstream, while unlikely, could cast doubt on its own solvency.

A representative for Windstream said the company declined to comment. A Uniti investor relations representative didn't immediately respond to a request for comment. Shares of Uniti gained 20 cents to close Thursday at $9.26 after trading as high as $9.84.

The fate of Windstream's lease has been a central question hanging over the restructuring. Uniti was spun off in a 2015 deal that gave it ownership of Windstream's network assets. Windstream then leased the network back from Uniti to provide service to Windstream's 1.4 million rural residential and small-business customers in 18 states.

Aurelius Capital Management LP, the hedge fund run by Mark Brodsky, contended that the sale and lease-back violated terms of Windstream's debt, and the resulting default plunged Windstream into bankruptcy.

Now Windstream is trying to renegotiate the lease, saying the deal for the copper-wire network is overpriced in an age when customers want high-speed Internet service on fiber-optic lines. It's possible the two companies could agree on a reduction of the lease beyond the limits spelled out by Uniti's covenants if lenders believe the deal would lead to a better outcome and grant a waiver, according to Bloomberg Intelligence analyst Phil Brendel.

Complicating matters is that unsecured bondholders want Windstream to completely stop monthly lease payments of about $54 million because they say it's not a true landlord-tenant lease -- it's just a financing arrangement -- and thus doesn't enjoy any special status under bankruptcy law. The value of those payments should be kept for creditors, they contend.

The more senior first-lien note holders have sided with the company, saying they should be the ones to bring any claims against Windstream if talks with Uniti fail. A hearing is scheduled for July 26.

Business on 07/12/2019

Print Headline: Uniti, Windstream in lease talks

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