October 11, 2012

Yesterday we learned that the bankrupt Eastman Kodak Company has reached agreement with the court-appointed "1114" retiree group (named after a bankruptcy code clause covering retiree benefits) to terminate health care benefits for all retirees effective December 31st of this year. No, this wasn't a shock for anyone, particularly not for retirees who have been expecting to lose some or all of their benefits even before Kodak filed for Chapter 11. Everyone knows that this sadly mismanaged company can no longer afford to deliver on its promises. As usual, CEO Perez once again hailed a wonderful management achievement, saying: "With this proposed resolution to our U.S. retiree benefit legacy liabilities, Kodak takes a major step forward toward our successful emergence. (The) agreement is a decisive accomplishment toward one of our fundamental objectives in our restructuring." Every time I hear him use the word successful I say "huh?"

Here's what we know:

Kodak has reached agreement with the 1114 committee (court approved retirees committee, unrelated to EKRA) to terminate retiree non-ERISA benefits at year end. This will include health, dental, life insurance, and survivor benefit (SIB).

The company will pay to the retiree committee:

  1. $7.5 million cash
  2. $635 million unsecured bankruptcy claim
  3. $15 million administrative claim

What's all that worth?

Depends on what creditors get out of the bankruptcy, but I would not expect them to get more than about 20 cents on the dollar on those claims, in total. That would mean the whole package is worth, in my estimate, about $137 million. The current health benefits are estimated at a total of $1.2 billion, and cost Kodak $10 million a month. So $137 million will not go far.

What should retirees expect?

Those over 65 now get Medicare plus an enhancement. The enhancement will no longer be funded by Kodak. Those under 65 have the most exposure, particularly if they are no longer working and may have to scramble for healthcare at considerable expense. Benefits will terminate at year end, but the bulk of the promised payments to the retirement committee consist of bankruptcy claims, which will get paid at the end of bankruptcy, and that won't come until March of 2013 at the earliest (and probably May or June). Thus retirees face an almost certain gap in their coverage. There may be some recompense for some or all retirees, but based on the amount the committee can expect to realize vs the current cost of benefits, that recompense will likely not be much.

And about that word, Equality:

Kodak has thousands of shareholders, creditors, and retirees. With this news the retirees will get equal treatment with the shareholders and creditors. The message to all: stand in line and hope for something from the bankruptcy of this once-great company.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).