What happened

Shares of Windstream Holdings (NASDAQ:WIN) fell 14.5% in September, according to data from S&P Global Market Intelligence. The slide started when executives from networking assets partner and former Windstream division Uniti Group (NASDAQ:UNIT) dropped some less-than-favorable comments about the regional telecom on the industry conference circuit. Another steep plunge followed later in the month, when a debtholder filed a notice of default against some of Windstream's senior notes.

Fiber optic wires against dark skies and thunderbolts.

Image source: Getty Images.

So what

In at least two separate conference presentations last month, Uniti CFO Mark Wallace admitted that the spin-off from Windstream with a single client was less than optimal, and that his company is working hard to add more customers and distance itself from the Windstream partnership. Thirty percent of Uniti's revenue already comes from clients not named Windstream, and Wallace hopes to raise that ratio to 50% within the next two years. That's hardly a vote of confidence in your largest customer, and Windstream shares fell after each of these presentations.

The notice of default argued that some of the assets that later became Uniti Group were transferred in a way that broke the covenants of Windstream's original debt agreements. Management denied these claims and promised to "vigorously defend against these allegations," in court if necessary. Either way, Windstream shares closed 11% lower the next day.

Now what

Since I'm not a lawyer specializing in contract disputes (or any kind of attorney at all, really), I can't say whether Windstream has overstepped the terms of its debt covenants. The senior debt notes in question currently hold a balance of $586 million at the end of 2016, representing 12% of Windstream's total long-term debt. A successful challenge might open the door for other complaints of a similar nature. I don't know where this issue is going next, but it looks like a significant risk at the very least.

As for Uniti inching away, that's simply a sound business strategy for the network assets manager. My own real-money investment in Uniti rests on that exact strategy, as I see significant value in Uniti as a fiber network serving many clients in different industries. This business never looked comfortable with an exclusive commitment to Windstream. So this was not exactly news -- more of a confirmation of Uniti's long-term purpose.

Things are not looking great for Windstream these days. Beyond the lack of loyalty from Unity and the looming debt covenant challenge, Windstream's trailing earnings and free cash flow are negative today. Share prices have plunged 72% lower year to date, driven by weak results and the elimination of a generous dividend policy. This is not the kind of baseless discount that would make me want to buy in before the inevitable bounce; Windstream it has all the appearance of a sinking ship. Uniti seems like the far superior half of this partnership.

Anders Bylund owns shares of Uniti Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.