S&P Assigns Ratings to Eastman Kodak DIP Revolver
Standard & Poor’s Rating Services said that it assigned ratings to U.S.-based Eastman Kodak Co.’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. S&P rated 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 January 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 S&P’s 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 S&P’s assessment of the lenders’ prospect for full recovery in the event that liquidation becomes necessary. The DIP loan ratings are point-in-time ratings S&P assigned on the date it performed the analysis, based on information provided and available at such time.
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.
In S&P’s 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 non-core 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 non-core IP and the sale of non-core 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, S&P is 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, S&P expects proceeds from additional licensing agreements or the outright sale of Kodak’s non-core 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, S&P characterizes 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.
To read S&P’s release in it’s entirety, click here.