S&P Starts Kodak (EKDKQ) at 'B-'; Still Sees as 'Vulnerable' Following Bankruptcy Emergence
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Standard & Poor's Ratings Services said it assigned a 'B-' corporate credit rating to Rochester, N.Y.-based Eastman Kodak Co. (OTCBB: EKDKQ) The outlook is stable.
In addition, we assigned a 'B-' issue rating to the $420 million first-lien term loan, with a '3' recovery rating (indicating our expectation of meaningful (50% to 70%) recovery of principal in the event of a payment default), and a 'CCC' issue rating to the $275 million second-lien term loan, with a '6' recovery rating (indicating our expectation of negligible (0% to 10%) recovery of principal in the event of a payment default).
"The ratings reflect our assessment of the company's 'vulnerable' business risk profile and 'highly leveraged' financial risk profile," said Standard & Poor's credit analyst Molly Toll-Reed.
In our view, Kodak's vulnerable business risk profile reflects its small share of a large, mature global market in commercial printing, facing secular decline in demand and significantly larger competitors with greater resources. Our base-case forecast assumptions include:
* Mid-single-digit revenue decreases, as declining end-of-life segments outweigh new product growth in the near term.
* Cost reductions and restructurings will enable Kodak to sustain adjusted annual EBITDA of about $160 million in the near term.
* Preservation of adequate liquidity, including substantial offshore cash balances.
The stable outlook incorporates our expectation that Kodak will be challenged to stabilize revenues and grow operating earnings, given expected declines in the commercial film and consumer inkjet segments. However, important rating support is provided by cash balances in excess of $800 million, which provide a significant cushion in the event of earnings and cash flow volatility.
The potential for a higher rating is constrained by Kodak's highly leveraged financial profile and lack of predictability of operating performance. Although the potential for lower ratings over the coming year is currently limited by sizable cash balances, ratings could be lowered if a substantial deterioration in operations leads us to view Kodak's liquidity as less than adequate.
In addition, we assigned a 'B-' issue rating to the $420 million first-lien term loan, with a '3' recovery rating (indicating our expectation of meaningful (50% to 70%) recovery of principal in the event of a payment default), and a 'CCC' issue rating to the $275 million second-lien term loan, with a '6' recovery rating (indicating our expectation of negligible (0% to 10%) recovery of principal in the event of a payment default).
"The ratings reflect our assessment of the company's 'vulnerable' business risk profile and 'highly leveraged' financial risk profile," said Standard & Poor's credit analyst Molly Toll-Reed.
In our view, Kodak's vulnerable business risk profile reflects its small share of a large, mature global market in commercial printing, facing secular decline in demand and significantly larger competitors with greater resources. Our base-case forecast assumptions include:
* Mid-single-digit revenue decreases, as declining end-of-life segments outweigh new product growth in the near term.
* Cost reductions and restructurings will enable Kodak to sustain adjusted annual EBITDA of about $160 million in the near term.
* Preservation of adequate liquidity, including substantial offshore cash balances.
The stable outlook incorporates our expectation that Kodak will be challenged to stabilize revenues and grow operating earnings, given expected declines in the commercial film and consumer inkjet segments. However, important rating support is provided by cash balances in excess of $800 million, which provide a significant cushion in the event of earnings and cash flow volatility.
The potential for a higher rating is constrained by Kodak's highly leveraged financial profile and lack of predictability of operating performance. Although the potential for lower ratings over the coming year is currently limited by sizable cash balances, ratings could be lowered if a substantial deterioration in operations leads us to view Kodak's liquidity as less than adequate.
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