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Kodak Bond Protection Cost Jumps After Earnings Miss Estimates

Kodak Bond Protection Jumps as Earnings Fall Short
An Eastman Kodak Co. Easyshare Mini camera is displayed during the 2011 International Consumer Electronics Show (CES) in Las Vegas. Photographer: Jacob Kepler/Bloomberg

The cost to protect Eastman Kodak Co.’s bonds from default jumped and its shares plunged after the 130-year-old imaging company’s fourth-quarter earnings fell short of analysts’ estimates.

Kodak reported an adjusted loss of 37 cents a share today, compared with the average analyst estimate of 5 cents of profit in a survey by Bloomberg News. Rochester, New York-based Kodak lost a U.S. International Trade Commission ruling this week that may hamper its effort to collect patent royalties from Apple Inc. and Research In Motion Ltd.

“You’ve got a real double whammy here,” said Mark Kaufman, managing director at Rafferty Capital Markets Inc. in New York. He owns Kodak shares and has a “buy” rating on the company. “It becomes not just Apple and RIMM. The thinking is maybe other parties in negotiations with Kodak on that patent may just take a wait-and-see attitude.”

Contracts protecting against the company’s default for five years increased 109.2 basis points to 971.6 basis points, the largest one-day increase since May 6, according to data provider CMA.

Kodak fell to the lowest since Aug. 31, declining 81 cents, or 18 percent, to $3.71 in New York Stock Exchange composite trading. The shares have fallen 31 percent this year. Kodak has posted losses in the two most recent quarters.

Valuing Patents

U.S. International Trade Commission Judge Paul Luckern said Jan. 24 that Apple’s iPhone and RIM’s BlackBerry don’t violate a Kodak patent. The administrative law judge’s findings are subject to review by the six-member commission, which has the power to block imports of products that infringe U.S. patents.

Kodak, which popularized photography with its Brownie and Instamatic cameras, has been trying to drum up royalties from its more than 1,000 digital-imaging patents to fund a shift to more modern devices. Kodak used the ITC to reach agreements in 2009 and 2010 with phone makers Samsung Electronics Co. and LG Electronics Inc. totaling $864 million.

“Kodak has never lost on this patent before,” Kaufman said. “This has been one of the biggest issues for the investing community, trying to figure out what that patent portfolio might be worth.”

Kodak spokesman David Lanzillo declined to comment.

The cost of protecting U.S. corporate bonds from default was little changed after Federal Reserve policy makers kept plans to buy $600 billion of Treasuries through June, indicating the accelerating recovery still needs stimulus to produce a larger reduction in unemployment.

Investor Confidence

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.1 basis point to a mid-price of 82.6 basis points as of 5:10 p.m. in New York, according to index administrator Markit Group Ltd.

The index, which typically falls as investor confidence improves and rises as it deteriorates, ended Jan. 24 at 81.7 basis points, the lowest since Jan. 14, 2010.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

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