What happened

Shares of regional telecom services company Windstream Holdings (NASDAQ:WIN) and its former subsidiary, networking infrastructure manager Uniti Group (NASDAQ:UNIT), had a hard day on Tuesday. In the morning session, Uniti's stock fell as much as 46.4%, and Windstream's shares took a 72.1% haircut at worst. By 3:30 p.m. EST, Uniti shares had recovered slightly to a 39% drop, while Windstream traded 62% below Friday's closing prices.

Yellow charting arrow crashing downward.

Image source: Getty Images.

So what

After the closing bell on Friday, a federal judge ruled against Windstream in a dispute with one of the company's largest bondholders. Hedge fund Aurelius Capital ManagementĀ filed a notice of default against the telecom in 2017, arguing that the spinoff action that created Uniti Group was a breach of the covenants regulating a bond deal between the company and the hedge fund. Friday's legal verdict may force Windstream to pay off the Aurelius bonds in full and could also trigger defaults among the company's other debt papers. In short, Windstream investors worry that the company might go bankrupt before this financial mess is settled.

Uniti has been attempting to distance itself from Windstream since that fateful spinoff in 2015, but the troubled telecom remains this company's largest client. If Windstream can't pay its bills, Uniti is sure to suffer the consequences.

Check out the latest UnitiĀ earnings call transcript.

Now what

Windstream has been circling the drain for years, but the situation is reaching a critical point in a quicker and more dramatic fashion than expected. The court decision will be appealed to a higher court, but Windstream's rearview mirror already looks back at many years of dwindling revenue and shrinking cash flows. Whatever happens to Aurelius and its claims, I don't see a future for this company.

As for Uniti, its management has been walking away from the Windstream relationship when it should have been running at a full sprint instead. The next few quarters will be tricky as Uniti's leadership needs to navigate Windstream's looming demise. The company may have to strike new deals with whatever business entity inherits Windstream's carcass, with or without bankruptcy proceedings along the way.

So today's market action is not surprising, and it isn't wrong. I still expect Uniti to survive the Windstream crash and find a new way forward, supplying networking services to a broader portfolio of clients. But it may take time, and the starting gun already inflicted some real pain. None of this will be easy, but I'm holding on to my Uniti shares until the dust starts to settle around Windstream's collapse.