Kodak Said to Face Pressure From Bondholders on Patent Sale

Avenue Capital Group and Blackstone Group LP (BX)’s GSO Capital Partners LP unit are among investors that own debt in Eastman Kodak Co. (EK) and are seeking to profit from a potential sale of its digital-imaging patents, said people with knowledge of the matter.

The creditors hold second-lien debt backed by Kodak’s patent portfolio and want the company to use cash from an asset sale to pay bondholders before pouring proceeds back into money- losing operations, said the people, who asked not to be named because the talks are private. Fidelity Investments and P. Schoenfeld Asset Management LP also hold Kodak second-lien debt, the people said. The stock fell 12 percent today.

Some bondholders have met with bankruptcy lawyers and restructuring advisers during the past two weeks to study forming a committee that would help ensure they are paid, said these people. Rochester, New York-based Kodak, which announced a sale process for its patents in July, may fetch about $3 billion for the portfolio, investment bank MDB Capital Group estimates. The company has also weighed options including bankruptcy as its losses and debt load create obstacles to a sale of the assets, people familiar with the matter said last month.

“Bondholders want the rights to the actual cash as opposed to trusting management to figure out how to monetize the assets and appropriately utilize the cash,” said Shannon Cross, an analyst at Cross Research in Livingston, New Jersey. “What they’re saying here is, we don’t trust management to utilize our cash wisely so that we will actually get paid back some day.”

Debt Discussions

Gerard Meuchner, a spokesman for Kodak, said it is premature to discuss the use of patent proceeds before a sale is concluded. He confirmed Kodak’s Sept. 30 statement that the company has “no intention” of filing for bankruptcy.

No second-lien creditors committee has been formed as of yet and the group has not spoken with the company about their concerns, said the people. Creating an ad hoc committee often signals creditors are concerned about a default and want to collectively negotiate with the company.

Separately, “a significant amount” of holders of Kodak’s unsecured debt have talked with Andrews Kurth LLP in New York to explore their options and rights, said Paul Silverstein, co- chair of the law firm’s bankruptcy and restructuring practice.

Spokesmen for Fidelity, Avenue, P. Schoenfeld and GSO declined to comment. Fidelity holds both unsecured and second- lien debt in Kodak, people said.

‘Cash Lifeline’

Bondholders will make a decision about forming a committee after Nov. 3, when Kodak announces its third-quarter results, said one person. The creditors are seeking more information about Kodak’s cash position, its European pension plans and whether vendors are tightening payment terms, one person said. Kodak has lost money for three straight years as it tries to transform into a digital printing and imaging company.

Creditors holding the second-lien debt backed by the patents may try to prevent any sale in order to keep Kodak from using the proceeds as a “cash lifeline” that would support the rest of the company, Cross at Cross Research said.

Some potential bidders for the patents are wary of proceeding because a purchase may amount to a so-called fraudulent transfer if Kodak is insolvent, said the people. Kodak confirmed Sept. 30 it hired Jones Day to advise it on options.

Talks With Advisers

“The patent sale will probably fetch a much better price in bankruptcy court and that would therefore be a more favorable outcome for much of the estate,” said Amer Tiwana, an analyst at CRT Capital Group LLC in Stamford, Connecticut. “If they were to sell the patents outside of bankruptcy, then there will be questions over fraudulent transfer and a potential for litigation from bondholders.”

Financial advisers from Moelis & Co., Houlihan Lokey, and Rothschild have spoken with creditors about their options, the people said. Kodak’s second-lien debtholders have spoken with lawyers at firms including Kramer Levin Naftalis & Frankel LLP, Stroock & Stroock & Lavan LLP, Kirkland & Ellis LLP and Akin Gump Strauss Hauer & Feld LLP, the people said.

Last week about 10 creditors holding $200 million of second-lien debt held a call with Kramer Levin to hear the firm’s advice on Kodak, said two of the people. Kramer later sent out engagement letters to creditors, trying to secure enough support to form a committee, the people said.

Cash Crunch

In recent days, Kramer Levin has told advisers it has spoken to about 20 creditors holding about $350 million of second-lien debt, two people said. There is about $750 million in second-lien debt.

A spokeswoman for Kramer Levin declined to comment.

Debt held by these second-lien creditors is backed by assets including the patent portfolio, according to the people, which could allow creditors to either block the sale or to sue for some of the proceeds.

“This may come to a head soon as potential buyers are hesitant to do anything outside of bankruptcy which could lead to a cash crunch,” said CRT’s Tiwana. “That would be the catalyst we’re all waiting for. If the patent sale is in doubt and other asset sales aren’t happening, then the company faces a cash crunch and it’s only a matter of time until we see Kodak file.”

Chief Executive Officer Antonio Perez, who took the helm in 2005, has sharpened Kodak’s focus on the printing business to help revive revenue. Perez announced plans in July to explore options for the portfolio of more than 1,100 patents, including some for processing, editing and storing images.

Patent Options

Lazard Ltd. (LAZ) is advising Kodak on options for the patent portfolio. Lazard also helped Nortel Networks Corp. sell about 6,000 patents and applications to a group that included Apple Inc. (AAPL) for $4.5 billion in June.

Kodak’s U.S. and international pension plans were underfunded by a combined $1.21 billion at the end of 2010, up from $1.11 billion a year earlier, according to the company’s annual securities filing. That amount was part of Kodak’s $2.66 billion in liabilities for pensions and benefits for retirees.

Kodak had $957 million in cash as of June 30. About a third of Kodak’s cash was in the U.S. at the end of 2010 with the rest of it in overseas accounts, according to Meuchner, the Kodak spokesman.

‘Ongoing Weakness’

The debt is rated CCC by Standard & Poor’s and Caa2 by Moody’s Investors Service. The ratings are the eighth levels below investment grade at each firm. Moody’s cut Kodak’s bond ratings Sept. 27 and indicated further reductions may follow, citing “ongoing weakness” in the company’s operations. Kodak, which tapped a credit line last month, has seen its market value sink by more than $30 billion from its 1997 peak.

Kodak’s $500 million of 9.75 percent notes due March 2018 fell 0.75 cent yesterday to 72.5 cents on the dollar to yield 17 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has declined from this year’s high of 102 cents on March 1.

The stock has plunged 77 percent this year. It dropped 17 cents to $1.24 as of 4 p.m. in New York Stock Exchange trading.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net

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