Thursday, November 3, 2011

Eastman Kodak Bonds: Update on Third Quarter Earnings Report

Eastman Kodak (own 2 2013 bonds: FINRA): This is my second post for today. 

I have been segregating recently my discussion on Eastman Kodak due to my intellectual interest in deciding whether to sell or to hold two 2013 bonds.  Having made the mistake in buying them, what do I do with them now when I have an unrealized loss of close to $1000.  I have elected, at least for the moment, to keep the bonds, since it is conceivable that EK might survive to pay par value in November 2013. While it is purely conjecture, I would anticipate recovering 20 to 30 cents per dollar of par value in a bankruptcy proceeding and the bond is trading near 40 now. That estimate is just an estimate and would require a successful sale of EK's digital patents.  I have zero interest in averaging down.  EK claims that it has no intention of filing bankruptcy. Intentions do change however.  

I have no confidence in EK surviving over the long term, and that was true when I purchased those two bonds. The only question for me then and now is whether EK declares bankruptcy before paying off its 2013 bond. The current pricing of that bond indicates that a large number of bond investors believe a default will occur prior to that bond's maturity in November 2013.

The third quarter results were far worse than expected, as EK reported a $222 million loss or 83 cents per share, compared to the consensus forecast of a 44 cent loss. Excluding revenues from patent licensing transaction, EK's profitable business line, sales decreased "only 5%". News Release

EK is now targeting a 2011 loss from continuing operations in the range of $400 to $600 million, up from its prior forecast of a $200 to $400 million loss. EK stated that it expected year end cash balances of $1.3 to $1.4 billion, excluding the proceeds from any sale of its patent portfolio. EK ended the 9/30/11 quarter with $862 million in cash. EK borrowed $160 million from its credit facility on 9/23/11. I would assume the cash balance at the end of the month would have been around $702 million without those borrowed funds. EK had $1.624 billion in cash on 12/31/2010 which just shows how much its operations are draining.

EK said it was pleased with the interest and progress in its proposed sale of 1,100 digital imaging patents.

My current opinion is that EK will not survive to pay off the 2013 note unless there is a successful sale of those 1,100 patents.  Eastman Kodak (EK) Bonds-Own 2013 Senior Bond EK gave a warning about its viability as a going concern in its SEC 10-Q filing referenced above (see pages 47-48, 10q & WSJ)  

EK is burning way too much cash in its operations.  Given the cash burn rate, I do not have much confidence that its operations will cease eating up cash rather than producing it in time to save it before November 2013 without a successful patent sale. Possibly, some time could be bought with an additional 500 million in secured financing which EK is apparently seeking.  I am just not willing to assume EK will start to make money from its operations anytime soon. The bond investors would be better off in my opinion if EK sold all of its operations and went into the patent licensing business as its sole operation.  

The earnings transcript is also a must read for anyone owning, or contemplating a purchase of the extremely risky EK bonds.  Transcript - Seeking Alpha The CEO said that the company that three transactions have already closed that will contribute $120 million in cash during the 4th quarter. One of the three was to close the day of the earnings call and involved the sale of a non-strategic asset and the other two were patent licenses.  The CEO expects other transactions to close in the current quarter. 

While the 2013 bond was originally issued in the principal amount of $500 million, EK has paid it down to $250 million.  SEC Form 10-Q for the Q/E 9/2011 at page 12  The secured debt probably contains covenants restricting  Kodak's ability to repurchase subordinated debt. It would be in everyone's interest to allow EK to make open market purchases of the 2013 bond at less than 50 cents on the dollar, but I see no evidence that has occurred or is likely to happen.  EK did buy back 50 million of the 2013 bond earlier this year as part of the deal involving the issuance of the 2019 secured debt (see page 13). The other $200 million was bought in 2010 with part of the proceeds from the 2018 secured note sale. After the 2013 bond, the next major maturities are $313 million of convertible notes in 2017; the $491 million in a 2018 secured note; and $247 million in 2019 secured note. 

EK's management has had at least a decade to transition the company successfully to new products. In that endeavor, the only possible grade for their effort is an "F".  It is case study for incompetence and ineptitude.

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