Over the past week, I have been absolutely stunned by the amount of news hitting the tape related to distressed debt investing and pricey debt financings. Delta, Blockbuster, Felcor, Eastman Kodak, MGM, Kimco, Toll all announced / completed deals this past week. Look at that list one more time and let it just sink in for a little bit. If that doesn't feel like a credit top, I do not know what does.
The one situation I would most like to quick point to is Eastman Kodak. Many distressed debt investors have looked at this one in one shape or another over the past few months. The converts, which were puttable next year, was a topic of interest at any cocktail hour I attended. Here is a 1 - year price chart:
The big run up in price over the past few days came on the heels of this announcement: Kodak to Raise Capital from KKR. Those that I talked to knew it was possible: the indenture on other outstanding bonds allowed for it; the ABL needed an amendment, and generally that's assumed to go through - one just needed to figure out where/if the capital was going to come through.
The proposed financing consists of $400M 7% convertible senior notes and up to $300M of senior secured second lien notes (the ones KKR will step up to the plate for - and get warrants in the process)
What were the intentions here? Well, for one, the notes KKR will invest in (second lien) will most surely be the fulcrum security if there is a reorganization down the road. And if Eastman Kodak does well, not only do they clip a potential fat coupon on the second lien note, but they also participate in the equity up-side via the warrants.
Before dismissing EK's future prospects, take a look at their geographical sales break down:
REGION/CNTRY 2006 2007 2008 AVG 2-YR GROWTH
1.The United States 4,700.00 4,403.00 3,834.00 -9.62%
2.Europe, Middle East 3,118.00 3,264.00 3,089.00 -.34%
3.Asia Pacific 1,694.00 1,592.00 1,500.00 -5.90%
4.Canada and Latin Ame 1,056.00 1,042.00 993.00 -3.01%
What I see here is a company that is not doing THAT bad overseas. Massive restructuring programs have streamlined the cost structure of the business. Also, there are rumors that EK may have a favorable position in a number of lawsuits that could reap potential monetary benefits for the company. The company is much leaner from an asset perspective (look how working capital is coming down) and the pension expense / funded status could provide an interesting financial engineering solution in the event of a restructuring.
Nonetheless, do not dismiss a business you once thought a dinosaur, especially if you can get KKR to structure the deal for you.