Uniti Group: An ongoing concern – Uniti Group Inc. (NASDAQ: UNIT)

We covered the covered Uniti Group (UNIT) with the expenses that the dividend was planned for a large ax.

Based on the evidence presented above and the fact that UNIT is better able to maintain more liquidity than less, UNIT has a higher probability of cutting dividends. This applies even if WIN leases are held as it is. Our option calculations recently showed that an annual 40 percent dividend (10 cents per quarter) is most likely as a payout, but we will soon know it for sure. We will also retest the theory that dividend cuts can never be "priced in".

UNIT declared only $ 0.05 for the quarter and surprised us with a pretty fitting statement in the conference call and voted almost together with our thoughts on penny.

For the tax year 2019, dividends attributable to our capital stock may be approximately $ 180 million, including dividends paid in January this year. During the next four quarters, such dividends may be below $ 70 million or about $ 0.37 per joint share in our credit agreement. Assuming $ 0.37 has been declared by our board for the tax year 2019, the amount will represent an annual dividend over the next four quarters of approximately 3.8% based on the latest trading levels.

This is an excellent feature for UNIT which is now about survival. UNIT's hand was forced by its banks, and the jump in funding rates from LIBOR + 300 base points to LIBOR + 500 basis points must have given UNIT religion.

Going concern

UNIT's auditors decided to put in the rather vicious "going concern" clause in their 10-k.

There are issues and events that give great doubts about our ability to continue as a business, and in its opinion of 31 December 2018 the annual accounts PricewaterhouseCoopers LLP, our independent registered public accounting firm, expressed great doubts as to whether we could continue as one business activity within one year after the date the accounts were issued as a result of Windstrom's bankruptcy contribution and its potential uncertain effects on Master Lease. Our annual accounts do not include any adjustments that may be due to the outcome of this uncertainty. We expect that Windstream will continue to perform on Master Lease and believe it is unlikely that Windstream will reject Master Lease because Master Lease is central to Windstrom's operations. We also intend to reduce our investments and dividends, as well as seek external funding to maintain our business.

Source: UNIT 10-K

Essentially, PWC forces UNIT's ability to remain a viable entity for a year. While the auditors are entitled to their opinion, we believe that this was a major overhaul of the current accounting rules. FASB ASC 205-40 provides guidance on when to use the language (our weight). The keyword here is "likely".

"Summary FASB ASC 205-40 provides the following new guidance as a result of the issue of ASU No. 2014-15: a. Defines the term significant doubt about the ability of a business to continue as an ongoing business (significant doubt) as follows : Substantial doubt that an entity's ability to continue as a prior concern exists when circumstances and events considered as aggregate indicate that it is likely that the entity will not be able to fulfill its obligations as they fall due one year after the date on which the accounts are issued (or within one year after the date on which the accounting calculation is available when applicable). The term probable is used consistently with use in Topic 450 of Precautions

Source: AICPA

Now, most people use the word likely to indicate a greater than 50% probability, which is also exactly where then International Financial Reporting Standards (IFRS) uses the term. However, US GAAP has a completely different interpretation.

The definition of probable means that there should be an approximate 80% chance of the event occurring (our weight). SC 450-20-20 defines "likely" as "likely to occur". Although the assessment of these terms is subject to an enterprise's judgment, "likely" under US GAAP is generally considered a much higher threshold (ie, about 80 percent) than "more likely than not" under IFRS (ie, greater than 50 percent). Therefore, several unforeseen circumstances may qualify for recognition as liabilities under IFRS than under US GAAP.

Source: Deloitte

Let's think about this for a minute. Although we have asked Windstream (OTCPK: WINMQ) the ability to negotiate with UNIT post bankruptcy, it is not a bookie on the planet that will give Windstream 80% odds of success. Although Windstream successfully negotiated a lower rental fee, considering only these outcomes, there is only one extremely remote possibility that the lease negotiations result in a lease as low as making the UNIT standard a year. UNIT would basically go to the "scorched earth" option if it was forced to accept payments that would result in a non-viable unit and keep the Windstream bondholders remaining with only worthless paper. Windstream also comfortably covers the rent with an OIBDA of over 3X. Therefore, the possibility is so remote that a lease would be a death to UNIT, that we would normally assign it a zero percent probability.

But with playing Devil's lawyer, if we assign both results a 25% probability, we are still left with one of sixteen odds or a less than 7% chance (0.25 X 0.25) of UNIT bankruptcy in 12 months. It's a pretty far cry from 80% required.

How the language "going concern" actually increased concern for UNIT

The auditors themselves set off a chain here with their work (our weight).

On March 18, 2019, we received a limited deduction from our lenders under the Credit Agreement and refrain from an event that is standard related solely to the receipt of an advisory opinion from our auditors for our 2018 audited accounts. The limited refusal was issued in connection with the fourth amendment (the "Change") to our Credit Agreement. During the liquidity of Windstrom's bankruptcy or at an earlier date, when certain other conditions are specified, the change generally limits our ability under the Credit Agreement to prepay unsecured debt and pay cash dividends over 90% of our REIT taxable income, irrespective of dividend paid deductions and excluding net gains. The change also increases the interest rate on the Term Loan Facility, which now has a LIBOR rate, subject to a 1.0% floor, plus a current margin of 5.0%, a 200 basis point increase over our previous rate . This increase will work, even though the facility's remaining maturity, due 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 says that there was a significant risk (error in our opinion) for non-viability in UNIT … in fact, the risk increased significantly. Ah, the irony!

What should I do now?

The cut will obviously send the eager dividend lovers out of the company. There are still viable ways to get a good income though. We will focus on the bonds as described earlier in our article.

Source: Cbonds

this point investors can also carefully consider selling $ 5 plaster for January 2020.

      
 
    Source: Interactivebrokers  
 
 ]    ]   
 
    Source: The author's calculations  
 
  The dividend is very good for what we consider a fairly external bankruptcy risk and has a large price pillow in front of it. 
 
  Conclusion 
 
  We were fortunate to stay out of equity as we did. We would never have predicted the exact chain of events that occurred after the Aurelius trial. 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 complete, we are not very optimistic about the prospect of UNIT. However, we believe that the bankruptcy risk of UNIT is remote and the assets have considerable value. The bonds are likely to recover all their value, even if UNIT goes under and we are still playing this through bonds. Sensational investors may consider the $ 5 cushions. When it comes to those who go long, you have our admiration and potentially condolences. 

 
 
     

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  Enlightenment:    I / we have no positions in any of the aforementioned shares, and no plans to start any positions within the next 72 hours.    I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). 
  Additional Information:  We have long been the aforementioned UNIT bonds. 
  Editor's Note: This article covers one or more microcap shares. Please note the risks associated with these shares.