(Bloomberg) -- Windstream Holdings Inc. filed for bankruptcy after it lost a court battle with Aurelius Capital Management LP over whether it defaulted on its bonds in 2015 by spinning off Uniti Group Inc.

The rural phone company listed more than $10 billion in assets and liabilities in a Chapter 11 petition in U.S. Bankruptcy Court in the Southern District of New York. Windstream has lined up a commitment for $1 billion of financing from Citigroup Inc. to get it through bankruptcy, according to a separate statement.

Kirkland & Ellis LLP is serving as legal counsel, PJT Partners LP is serving as financial adviser and Alvarez & Marsal is serving as restructuring adviser to Windstream, according to the statement.

Windstream, which serves about 1.4 million consumers and small businesses in 18 states, had warned that a defeat in the Aurelius lawsuit could force it to seek bankruptcy protection or liquidation. But management gave repeated assurances in the lead up to the ruling that it was confident of a favorable verdict. “We clearly look forward to getting that, so we can get on to refinancing the balance sheet,” by Chief Financial Officer Robert Gunderman said at a Dec. 5 investor conference.

The verdict in Manhattan federal court was the latest victory for New York hedge fund Aurelius, led by Mark Brodsky, which said that the Uniti deal unfairly stripped bondholders of assets that back up their investment. Actions by Windstream Services amounted to a breach of its financial covenants, and Aurelius is entitled to a $310 million judgment, Judge Jesse Furman ruled.

‘Comprehensive Review’

“Following a comprehensive review of our options, including an appeal, the board of directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact” of the court ruling, Tony Thomas, president and chief executive officer of Windstream, said in the statement.

Windstream said in a statement that Aurelius’s lawsuit amounted to market manipulation in the credit-default swaps market. It implied that the hedge fund sued it only because it was betting in the derivatives market that the phone-service provider would default, and wanted to push the company into dire straits.

“Windstream strongly disagrees with Judge Furman’s decision,” Thomas said in the statement, adding that it “believes Aurelius engaged in predatory market manipulation to advance its own financial position through credit default swaps at the expense of many thousands of shareholders, lenders, employees, customers, vendors & partners.”

A representative for Aurelius declined to comment.

‘Unregulated Marketplace’

Thomas said “time is well-past for regulators to carefully examine ramifications of an unregulated credit default swap marketplace.” Windstream doesn’t anticipate a need to restructure material operations, according to the statement.

Aurelius was the lone creditor to claim that Windstream defaulted on its bonds, with the hedge fund bringing its case long after the 2015 spinoff of Uniti was completed. Other bondholders later agreed to a deal designed to help the company retroactively cure any default caused by the spinoff of Uniti, which leases copper and fiber cables back to its former parent.

Aurelius didn’t sign on to the deal and ultimately prevailed in court, with Judge Furman faulting Windstream’s handling of the dispute by saying its “financial maneuvers — and many of its arguments here — are too cute by half.”

Shares of Uniti Group tumbled earlier in the day as Bloomberg reported the filing was imminent. The company gets more than two-thirds of its revenue from a master lease that gives Windstream the exclusive right to use the Uniti’s telecommunications network assets. That lease could be in jeopardy because of the sizable expense of the lease to Windstream -- more than $650 million a year -- and bankruptcy proceedings often lead to revision or rejection of existing contracts.

Windstream is dependent on Uniti to serve them, making a complete severance of their contract less likely. Uniti has said “the validity of our master lease agreement with Windstream was not impacted by the ruling, and access to our network remains critical to Windstream’s operations and its ability to serve its customers.”

‘No Pleasure’

In a Feb. 19 statement before the bankruptcy filing, Aurelius said it took “no pleasure” in Windstream’s financial predicament, but that the company could have avoided its present circumstances by settling earlier.

Aurelius’s Brodsky is a distressed debt investor who got his start working for Elliott Management’s Paul Singer. He has taken on the likes of General Motors, Argentina and Puerto Rico in litigation that relies on the Harvard-trained lawyer’s ability to use novel legal theories and target grey areas in the law.

In Argentina, one of Brodsky’s biggest wins, Aurelius drew the ire of an entire nation. The decade-long legal battle got ugly at times, with holdout creditors going so far as to seize an Argentine naval ship in Ghana to pressure the country into paying what it owed.

The case is Windstream Business Holdings, LLC, 19-22310, U.S. Bankruptcy Court in Southern District of New York (White Plains)

(Updates with details from filing and statement throughout.)

--With assistance from Josh Saul, Adam Cataldo, Eliza Ronalds-Hannon and Sridhar Natarajan.

To contact the reporter on this story: Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Dan Wilchins

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