We recently covered the Uniti Group (UNIT) with the editions that the proceeds were scheduled for a big ax.
Based on the above evidence and the fact that UNIT has maintained more liquidity than less, UNIT is more likely to cut profits. This is true even though the WIN lease is held as it is. Our options calculations last showed that an annual 40 cent dividend (10 cents a quarter) is the most likely payout, but we will soon know for sure. We also want to retest this theory that dividend savings can never really be "priced".
UNIT declared only $ 0.05 for the quarter and surprised us with a pretty fitting statement in the conference call and almost matched our thoughts to penny.
For tax 2019, dividends attributable to our capital stock may be approx. $ 180 million, including dividends paid in January this year. Over the next four quarters, such dividends must be below $ 70 million or about $ 0.37 per common share under our credit agreement. If we assume the full $ 0.37, our Board of Directors declared for the 2019 tax year that the amount would represent an annual dividend of the next four quarters of approx. 3.8% based on recent trading levels.
This is an excellent feature for UNIT which is now about survival. UNIT's hand was forced by its bankers, and the jump in financing rates from LIBOR + 300 basis points to LIBOR + 500 base points must surely have given UNIT religion.
UNIT's auditors decided to put in the rather incredible "going concern" clause in their 10-K.
There are conditions and events that raise great doubts about our ability to continue as a business, and in its opinion on our 31 December 2018 financial statements PricewaterhouseCoopers LLP, our independent registered public accounting firm, expressed great doubts as to whether we could continue as an operating company within one year of the date of the financial statements issued as a result of Windstream's bankruptcy and its potential uncertain effects on Master Lease. Our financial statements do not include any adjustments that may be due to the outcome of this uncertainty. We expect that Windstream will continue to perform at Master Lease and believes that Windstream is not likely to reject Master Lease because Master Lease is at the heart of Windstrom's operations. We also intend to reduce our investment costs and dividends and seek external financing to maintain our activities.
Source: UNIT 10-K
Essentially, PWC doubts that UNIT can remain a viable entity for a year. While the auditors are entitled to their opinion, we believe that this was a major overreach to the current accounting rules. FASB ASC 205-40 provides guidance on when to use the language (our weight). The keyword here is "likely".
"In summary, the FASB ASC 205-40 provides the following new guidance as a result of the issue of ASU No. 2014-15: a. Defines the concept of significant doubt about a company's ability to continue as an ongoing business (significant doubt) as follows: Substantial doubts that an entity's ability to continue as a degrading concern exists when circumstances and events considered as aggregate show that it is likely that the entity cannot fulfill its obligations when they fall due within one year after the date of the release of the financial statements (or by one year after the date on which the financial statement may be issued, where applicable). The term probable is used consistently with its use in Topic 450 on Prerequisites .
Now most words use the word to indicate a greater probability than 50%. is how International Financial Reporting Standards (IFRS) use the term. However, US GAAP has a very different interpretation.
The definition of probable means that there must be an approx. 80% chance that the event will occur (weight our).
SC 450-20-20 defines "probable" as "likely to occur". While the assessment of these terms is subject to a unit's assessment, US GAAP considers "likely" typically a much higher threshold (i.e., about 80 percent) than "more likely than not" according to IFRS is (ie, greater than 50 percent). Therefore, several unforeseen situations may qualify for recognition as liabilities under IFRS than in US GAAP.
Let's think about this for a moment. Although we have presented Windstream (OTCPK: WINMQ) ability to negotiate with UNIT post bankruptcy, there is no bookie on the planet that would give Windstream 80% odds of success. Although Windstream successfully negotiated a lower lease payment, considering these particular results, there is only an extremely remote possibility that the lease negotiations result in a rent that is so low that the standardization of UNIT is one year. UNIT would essentially go to the "burnt land" option if it was forced to accept payments that would result in a non-viable unit and ensure that Windstream bondholders are left with just worthless paper. Windstream also comfortably covers the rent with an OIBDA of over 3X. Therefore, the possibility is so distant that a rent cut would be a death for UNIT, that we would normally assign it a zero percent probability.
But we play Devil's lawyer, if we give both results a 25% probability, we are still left with one of sixteen odds or one less than a 7% chance (0.25 x 0.25) of UNIT bankruptcy in 12 months. It's a pretty long scream from 80% required.
How the language's "going concern" language actually increased concern for UNIT
The auditors themselves settled a chain here with their work (weight ours).
On March 18, 2019, we received a limited waiver from our lenders under our credit agreement, waiving a standard-related event solely for the receipt of a statement of assurance from our auditors for our 2018 audited financial statements. The limited exception was issued in connection with the fourth amendment (the "change") to our credit agreement. Generally, during Windstream's bankruptcy or at an earlier date when certain other conditions are stated, the change limits our ability under the credit agreement to prepay unsecured debt and pay cash dividends of over 90% of our REIT taxable income, regardless of dividends paid deductions and excluding any net gains. The change also increases the interest rate on our loan facility, which now has a LIBOR rate that is subject to a 1.0% floor plus an applicable margin of 5.0%, an increase of 200 basis points above our previous rate . This increase will apply even if the remaining period of the facility matures on October 24, 2022.
The increased interest rate will knock out $ 42 million of adjusted funds from operations (AFFO).
Source: UNIT presentation
So the auditors know that there was a significant risk (wrong in our opinion) for the UNIT's lack of viability … actually increased this risk. Oh, the irony!
What to do now?
The clip will of course send the scary dividend lovers out of the company. However, there are still viable ways to get a good income though. We will focus on the bonds as described earlier in our article.
This point, investors can also carefully consider selling the $ 5 sets to January 2020.
Source: The author's calculations
The yield is really good for what we consider a fairly distant bankruptcy risk and has a great price pillow in front of it.
We were fortunate to stay out of equity as we did. We would never have predicted the exact chain of events that happened after the Aurelius case. But the sheer risk kept us away, and our last deal on this was from the short side.
Even at this time, until the Windstream reorganization is over, we are not very optimistic about the prospects of UNIT. However, we believe that the bankruptcy risk of UNIT is remote and the assets bear considerable value. The bonds are likely to regain their value even if UNIT goes under and we still play this through bonds. Entertaining investors can consider the $ 5 pits. As for those who go long the joint, you have our admiration and potentially our condolences.