February 22, 2012 / 10:54 PM / 7 years ago

S&P Asgns Rtgs To Eastman Kodak DIP Facility

(Reuters) - 	
	
NEW YORK (Standard & Poor's) Feb. 22, 2012--Standard & Poor's Rating Services 	
said today that it assigned ratings to U.S.-based Eastman Kodak Co. (Kodak)'s 	
$950 million debtor-in-possession (DIP) credit facility, comprising a $250 	
million revolving credit facility and a $700 million term loan due July 2013. 	
We rate the revolver 'B+' and the term loan 'B-'. The company's corporate 	
credit rating remains 'D'. Kodak filed a voluntary petition under Chapter 11 	
of the Bankruptcy Code on Jan. 19, 2012. 	
	
The higher rating on the DIP revolver reflects its senior repayment position 	
and borrowing base restrictions with regard to cash, accounts receivable, 	
inventory, machinery, and equipment relative to the DIP term loan under a 	
liquidation scenario. It also reflects our expectation that the revolving 	
facility has likely full repayment prospects even in a liquidation scenario.	
	
The ratings reflect Standard & Poor's view of the likelihood of repayment of 	
the DIP loans in full upon the company's reorganization and emergence from 	
bankruptcy, as well as our assessment of the lenders' prospect for full 	
recovery in the event that liquidation becomes necessary. The DIP loan ratings 	
are point-in-time ratings we assigned on the date we performed the analysis, 	
based on information provided and available at such time and the assumptions 	
that we outline in this report. We will withdraw these ratings shortly after 	
publishing and Standard & Poor's will not review, modify, or monitor the 	
ratings based on subsequent information or changes to market conditions.	
	
The $250 million asset-based DIP revolver (ABL) consists of $225 million 	
available to Kodak and $25 million available to Kodak Canada Inc. Kodak is the 	
sole borrower under the term loan.	
	
The ABL is guaranteed by Kodak's direct and indirect domestic subsidiaries, 	
and Kodak Canada's direct and indirect wholly owned Canadian subsidiaries in 	
the case of the Canadian revolver. The ABL has a first-priority security 	
interest on cash, accounts receivable, inventory, and machinery and equipment 	
and a second-priority lien on the collateral securing the term loan.	
	
The term loan has a first-priority security interest on essentially the rest 	
of the assets, including real property, intellectual property, and a 65% stock 	
pledge of first-tier foreign subsidiaries. It has a second-priority security 	
interest on the ABL collateral.	
	
Availability under the revolver is governed by a borrowing base, which 	
consists of 1) 85% of eligible trade receivables, plus 2) the lesser of 65% of 	
cost of eligible inventory and 85% of the net orderly liquidation value of 	
eligible inventory, plus 3) the lesser of $35 million and 75% of net orderly 	
liquidation value of eligible machinery and equipment, minus reserves, which 	
include a permanent availability block that holds U.S. borrowing capacity $25 	
million below the stated commitment amount.	
	
Financial covenants include minimum consolidated adjusted EBITDA starting from 	
a shortfall of $105 million as of April 30, 2012, with gradual step-ups 	
turning into a surplus requirement of $40 million as of Feb. 28, 2013, and 	
finally ending in a minimum of $175 million as of June 30, 2013. There is a 	
minimum U.S. liquidity covenant of $250 million until March 31, 2012, then 	
$150 million until Sept. 30, 2012, and any day after $100 million. 	
	
Although Kodak has certain legacy businesses that are profitable and generate 	
positive cash flow, we believe its ability to reorganize and raise sufficient 	
capital to fully repay the DIP loans at emergence could be complicated by 	
film's ongoing secular decline, prospects for continued large cash 	
expenditures in printing markets targeted for growth, costs to restructure and 	
revive core businesses, and uncertainty regarding the ability to monetize 	
noncore intellectual property (IP). 	
	
In our opinion, the company's value as a going concern is a result of its 	
profitable core businesses, which are Prepress Solutions, Document Scanners, 	
and Kiosk business lines. Kodak plans to grow by building its businesses in 	
the consumer and commercial print markets. However, Kodak currently has 	
low-single-digit consumer ink jet printer market share and relatively modest 	
collective consumer and commercial printing revenues in growth markets of 	
about $1.2 billion. Growing these businesses in competitive markets while 	
restructuring its core operations, exiting noncore markets, and funding its 	
significantly underfunded employee benefit obligations is likely to continue 	
to produce operating losses and cash flow deficits in 2012.	
	
In recent years, Kodak has relied on significant proceeds from licensing 	
noncore IP and the sale of noncore assets to fund its plan to transform itself 	
from a traditional film manufacturer into a digital technology company. 	
However, this cash source shrank dramatically in 2011 and legal ruling on the 	
validity of key patents remains unsettled. The DIP facility provides the 	
company interim liquidity relief, however, the factors that drove Kodak into 	
bankruptcy remain. Absent a large monetary settlement of its digital patents, 	
we believe that there are risks surrounding Kodak's liquidity and ability to 	
meet its covenants. In particular, we are concerned that the company's cash 	
flow drain would lead to a violation of its minimum U.S. liquidity covenant in 	
the later part of this year. 	
	
Ultimately, we expect proceeds from additional licensing agreements or the 	
outright sale of Kodak's noncore IP portfolio to help address its liquidity 	
needs and enhance lender recovery prospects. Nonetheless, there is a wide 	
range of possible outcomes, given a history of favorable and unfavorable 	
patent validity rulings and it is difficult for us to predict the actual 	
nominal value and timing of monetization. In light of these uncertainties, we 	
characterize Kodak's ability to fully repay the DIP through a timely 	
reorganization as high risk and note that DIP lenders could be incentivized to 	
force liquidation if there is no clear path to a successful and timely IP 	
settlement. 	
	
As part of our DIP loan rating analysis, we assessed the DIP lenders' prospect 	
for full recovery of principal in the event that the company's efforts to 	
reorganize are unsuccessful and that bankruptcy converts to liquidation. For 	
the purposes of this analysis, we consider the orderly liquidation value of 	
the company's assets for the collateral securing the DIP loans. This analysis 	
also contemplates that a liquidation scenario is most likely in the event that 	
the monetization of its noncore IP assets falls well short of its 	
expectations. We applied the following estimated advance rates to the 	
company's Dec. 31, 2011, balance-sheet values:	
     -- Trade receivables       70%	
     -- Inventory               50%	
     -- Machinery & equipment   20%	
     -- Real property           10%	
 	
Other assumptions of the liquidation analysis include:	
     -- A fully drawn ABL revolver less $25 million of U.S. availability block.	
     -- About $50 million of cash remain on the balance sheet, which coincides 	
with our assessment that the company would violate its minimum U.S. liquidity 	
covenant.	
     -- An estimated distressed patent sale value of about $220 million 	
(approximately 10% of third-party valuations) under the assumption that the IP 	
monetization plan is unsuccessful. We view the IP monetization plan as subject 	
to a wide range of possible outcomes. Our liquidation scenario considers an 	
unsuccessful outcome.	
     -- Estimated liquidation and administrative expenses of 7% of the gross 	
proceeds.	
 	
No residual value available from the stock pledge of the U.K. and Germany 	
subsidiaries due to structurally senior foreign indebtedness and liabilities, 	
including $1.2 billion of U.K. pension liabilities and about $80 million of 	
German notes.	
For the rest of first-tier foreign subsidiaries that provide a 65% stock 	
pledge, we assigned similar advance rates to their liquid assets.	
	
Given these assumptions, the net proceeds available for distribution of about 	
$951 million would provide for substantial overcollateralization of the DIP 	
revolver and about 1x coverage for the DIP term loan. Given the priority 	
position of the asset-based revolver over the term loan, the DIP revolver 	
rating is enhanced at 'B+', while the DIP term loan rating is unenhanced at 	
'B-'.	
 	
RELATED CRITERIA AND RESEARCH	
     -- Corporate Ratings Criteria--Secured Debt/Recovery Ratings, Overview; 	
Bank Loan Rating Methodology; Collateral Value Analysis; Debtor-in-Possession 	
(DIP) Financing, Oct. 28, 2004	
     -- Debtor-In-Possession (DIP) Financing, Nov. 4, 2003	
 	
RATINGS LIST	
Eastman Kodak Co.	
 Corporate Credit Rating                      D/--/--	
	
New Ratings	
	
Eastman Kodak Co.	
 $250M revolving credit facility due 2013     B+	
 $700M term loan due 2013                     B-	
 	
	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.	
	
Primary Credit Analyst: John Moore, New York 212 438-2140;	
                        john_moore@standardandpoors.com	
Recovery Analyst: Jenny Chang, CFA, New York (1) 212-438-8671;	
                  jenny_chang@standardandpoors.com	
	
	
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 Time         USN   User   Headline
 22/02/2012   WNA0  WE     S&P ASGNS RTGS TO EASTMAN 
 17:40:47     773   SCRIP  KODAK DIP FACILITY
                    T      
 NEW YORK (Standard & Poor's) Feb. 22, 2012--Standard & Poor's Rating Services
said today that it assigned ratings to U.S.-based Eastman Kodak Co. (Kodak)'s
$950 million debtor-in-possession (DIP) credit facility, comprising a $250
million revolving credit facility and a $700 million term loan due July 2013. We
rate the revolver 'B+' and the term loan 'B-'. The company's corporate credit
rating remains 'D'. Kodak filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on Jan. 19, 2012. The higher rating on the DIP revolver reflects
its senior repayment position and borrowing base restrictions with regard to
cash, accounts receivable, inventory, machinery, and equipment relative to the
DIP term loan under a liquidation scenario. It also reflects our expectation
that the revolving facility has likely full repayment prospects even in a
liquidation scenario. The ratings reflect Standard & Poor's view of the
likelihood of repayment of the DIP loans in full upon the company's
reorganization and emergence from bankruptcy, as well as our assessment of the
lenders' prospect for full recovery in the event that liquidation becomes
necessary. The DIP loan ratings are point-in-time ratings we assigned on the
date we performed the analysis, based on information provided and available at
such time and the assumptions that we outline in this report. We will withdraw
these ratings shortly after publishing and Standard & Poor's will not review,
modify, or monitor the ratings based on subsequent information or changes to
market conditions. The $250 million asset-based DIP revolver (ABL) consists of
$225 million available to Kodak and $25 million available to Kodak Canada Inc.
Kodak is the sole borrower under the term loan. The ABL is guaranteed by Kodak's
direct and indirect domestic subsidiaries, and Kodak Canada's direct and
indirect wholly owned Canadian subsidiaries in the case of the Canadian
revolver. The ABL has a first-priority security interest on cash, accounts
receivable, inventory, and machinery and equipment and a second-priority lien on
the collateral securing the term loan. The term loan has a first-priority
security interest on essentially the rest of the assets, including real
property, intellectual property, and a 65% stock pledge of first-tier foreign
subsidiaries. It has a second-priority security interest on the ABL collateral.
Availability under the revolver is governed by a borrowing base, which consists
of 1) 85% of eligible trade receivables, plus 2) the lesser of 65% of cost of
eligible inventory and 85% of the net orderly liquidation value of eligible
inventory, plus 3) the lesser of $35 million and 75% of net orderly liquidation
value of eligible machinery and equipment, minus reserves, which include a
permanent availability block that holds U.S. borrowing capacity $25 million
below the stated commitment amount. Financial covenants include minimum
consolidated adjusted EBITDA starting from a shortfall of $105 million as of
April 30, 2012, with gradual step-ups turning into a surplus requirement of $40
million as of Feb. 28, 2013, and finally ending in a minimum of $175 million as
of June 30, 2013. There is a minimum U.S. liquidity covenant of $250 million
until March 31, 2012, then $150 million until Sept. 30, 2012, and any day after
$100 million. Although Kodak has certain legacy businesses that are profitable
and generate positive cash flow, we believe its ability to reorganize and raise
sufficient capital to fully repay the DIP loans at emergence could be
complicated by film's ongoing secular decline, prospects for continued large
cash expenditures in printing markets targeted for growth, costs to restructure
and revive core businesses, and uncertainty regarding the ability to monetize
noncore intellectual property (IP). In our opinion, the company's value as a
going concern is a result of its profitable core businesses, which are Prepress
Solutions, Document Scanners, and Kiosk business lines. Kodak plans to grow by
building its businesses in the consumer and commercial print markets. However,
Kodak currently has low-single-digit consumer ink jet printer market share and
relatively modest collective consumer and commercial printing revenues in growth
markets of about $1.2 billion. Growing these businesses in competitive markets
while restructuring its core operations, exiting noncore markets, and funding
its significantly underfunded employee benefit obligations is likely to continue
to produce operating losses and cash flow deficits in 2012. In recent years,
Kodak has relied on significant proceeds from licensing noncore IP and the sale
of noncore assets to fund its plan to transform itself from a traditional film
manufacturer into a digital technology company. However, this cash source shrank
dramatically in 2011 and legal ruling on the validity of key patents remains
unsettled. The DIP facility provides the company interim liquidity relief,
however, the factors that drove Kodak into bankruptcy remain. Absent a large
monetary settlement of its digital patents, we believe that there are risks
surrounding Kodak's liquidity and ability to meet its covenants. In particular,
we are concerned that the company's cash flow drain would lead to a violation of
its minimum U.S. liquidity covenant in the later part of this year. Ultimately,
we expect proceeds from additional licensing agreements or the outright sale of
Kodak's noncore IP portfolio to help address its liquidity needs and enhance
lender recovery prospects. Nonetheless, there is a wide range of possible
outcomes, given a history of favorable and unfavorable patent validity rulings
and it is difficult for us to predict the actual nominal value and timing of
monetization. In light of these uncertainties, we characterize Kodak's ability
to fully repay the DIP through a timely reorganization as high risk and note
that DIP lenders could be incentivized to force liquidation if there is no clear
path to a successful and timely IP settlement. As part of our DIP loan rating
analysis, we assessed the DIP lenders' prospect for full recovery of principal
in the event that the company's efforts to reorganize are unsuccessful and that
bankruptcy converts to liquidation. For the purposes of this analysis, we
consider the orderly liquidation value of the company's assets for the
collateral securing the DIP loans. This analysis also contemplates that a
liquidation scenario is most likely in the event that the monetization of its
noncore IP assets falls well short of its expectations. We applied the following
estimated advance rates to the company's Dec. 31, 2011, balance-sheet values: --
Trade receivables 70% -- Inventory 50% -- Machinery & equipment 20% -- Real
property 10% Other assumptions of the liquidation analysis include: -- A fully
drawn ABL revolver less $25 million of U.S. availability block. -- About $50
million of cash remain on the balance sheet, which coincides with our assessment
that the company would violate its minimum U.S. liquidity covenant. -- An
estimated distressed patent sale value of about $220 million (approximately 10%
of third-party valuations) under the assumption that the IP monetization plan is
unsuccessful. We view the IP monetization plan as subject to a wide range of
possible outcomes. Our liquidation scenario considers an unsuccessful outcome.
-- Estimated liquidation and administrative expenses of 7% of the gross
proceeds. No residual value available from the stock pledge of the U.K. and
Germany subsidiaries due to structurally senior foreign indebtedness and
liabilities, including $1.2 billion of U.K. pension liabilities and about $80
million of German notes. For the rest of first-tier foreign subsidiaries that
provide a 65% stock pledge, we assigned similar advance rates to their liquid
assets. Given these assumptions, the net proceeds available for distribution of
about $951 million would provide for substantial overcollateralization of the
DIP revolver and about 1x coverage for the DIP term loan. Given the priority
position of the asset-based revolver over the term loan, the DIP revolver rating
is enhanced at 'B+', while the DIP term loan rating is unenhanced at 'B-'.
RELATED CRITERIA AND RESEARCH -- Corporate Ratings Criteria--Secured
Debt/Recovery Ratings, Overview; Bank Loan Rating Methodology; Collateral Value
Analysis; Debtor-in-Possession (DIP) Financing, Oct. 28, 2004 --
Debtor-In-Possession (DIP) Financing, Nov. 4, 2003 RATINGS LIST Eastman Kodak
Co. Corporate Credit Rating D/--/-- New Ratings Eastman Kodak Co. $250M
revolving credit facility due 2013 B+ $700M term loan due 2013 B- Complete
ratings information is available to subscribers of RatingsDirect on the Global
Credit Portal at www.globalcreditportal.com. All ratings affected by this rating
action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left column.
Primary Credit Analyst: John Moore, New York 212 438-2140;
john_moore@standardandpoors.com Recovery Analyst: Jenny Chang, CFA, New York (1)
212-438-8671; jenny_chang@standardandpoors.com
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