October 3, 2011
In our office, when I am planning to be out of town we chuckle about what calamity will occur while I'm gone. That I was away when AIG, Merrill Lynch, and Lehman Brothers collapsed in September 2008, or during the brief-but-harrowing "flash crash" of May 2010 serves to reinforce the idea. And so naturally I was away last week when news stories and conversations began to link that best known of Rochester brand names, Kodak, with the word "bankruptcy."
Shock and disbelief were the most common emotions, even though we have all seen Kodak stock slide from $94 (March 1997) to $30 (June 2007) to just 78 cents. We have seen Kodak's local workforce reduced 90% in less than 20 years and watched buildings imploded, leaving Kodak Park looking like Berlin in 1945. We were shocked even though we nearly all use digital cameras now, those of us who haven't gone to using the camera built into every new phone. We share photos online and view them on computer screens, but only rarely print one out to put in a frame. Perhaps we shouldn't have been surprised. But like a family member with a long illness, you're still not prepared when the doctor says the end is at hand.
Over the weekend at the barbershop, coffee shop, and Wegman's, I was asked repeatedly whether Kodak might really file for bankruptcy and what it might mean. To answer, let's look at two recent reports: that Kodak had drawn down a $160 million credit line, and had hired Jones Day, a law firm with expertise in "restructuring." The credit line borrowing is notable because Kodak has for the last few years put great emphasis on how much cash it holds, saying it had nearly $1 billion on hand as of June 30. Investors immediately wondered whether the new borrowing signaled a cash crunch. It's a little like the guy who is always flashing a bankroll. When you see him pawning his wife's jewelry, you wonder why. And about "restructuring" - that's another word for "can't pay your bills." To restructure your debt means you ask your creditors to make the terms easier, or swap the debt for an ownership stake in the company. One way to restructure is through bankruptcy, though that is not the only way. Regardless, nearly everyone gets bruised in a restructuring.
"What about the patents?" is another question I heard a few times. Kodak has been talking with potential buyers in the hopes of bringing in up to $3 billion, plenty to pay off debts of about $1.5 billion with some to spare. The catch is that if Kodak filed for Chapter 11 bankruptcy reorganization after selling its patents, the buyers might find the sale thrown into court and invalidated. The legal principle of fraudulent conveyance means you can't sell your car to your brother for fifty bucks the day before you file for personal bankruptcy. Kodak's chicken-and-egg problem is that if they can sell those patents they could get plenty of cash and stave off bankruptcy, but the risk of bankruptcy is hindering a possible sale.
But the right bankruptcy might work for all involved. Here's how: Kodak, its creditors, and the potential buyer of the patents could draw up a prepackaged bankruptcy, one where all terms are negotiated and agreed and then laid before the court for approval. In this scenario, Kodak gets its cash and agrees to use it to pay off its debts, and the buyers of the patents get clear title and don't have to worry about legal trouble because the purchase gets blessed by the bankruptcy court. Kodak would keep making and selling its products, workers would keep showing up at Kodak Park and 343 State Street, bondholders get paid in full, and stockholders would still own their stock (just don't expect much upside). It would be an uncommon but not unheard-of deal. Texaco lost a major lawsuit in 1985 and filed for bankruptcy in 1987, continued trading on the NYSE, and emerged a year later, more or less whole.
That scenario, the best bankruptcy outcome, would still leave Eastman Kodak struggling to make the transition that they so badly need.
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).