Eastman Kodak Co. (EKDKQ:US)’s setback last week in its two-year legal fight over a digital-camera patent has bond investors fretting there will be little left over for them in the 132-year-old company’s bankruptcy.
Kodak’s $250 million of 7.25 percent senior unsecured notes due in 2013 lost 48 percent of their value after the May 21 decision. Its secured bonds fell about 15 percent. More than $1 billion of potential patent value may have “evaporated” because of a U.S. International Trade Commission judge’s preliminary finding in favor of Apple Inc. (AAPL:US) and Research in Motion Ltd., according to debt researcher KDP Investment Advisors Inc.
The reversal may undermine the Rochester, New York-based camera maker’s plan to transform itself into a digital printing business by selling a collection of patents and its photography unit, leaving holders of its $1.4 billion of bonds (EK:US) on the hook for more losses. Matthew Hart, an adviser to Kodak at Lazard Freres & Co., said in a January court filing that there’d be enough money to pay off secured bondholders in full.
“That money seems to really be gone,” Scott Dinsdale, an analyst at Montpelier, Vermont-based KDP, said in a telephone interview. “There’s not enough to cover the debt under a worst case scenario, which I think is where we’re headed.”
Kodak, the photography pioneer that introduced the Brownie camera more than a century ago, filed for bankruptcy on Jan. 19 as the rise of digital photography impaired its high-margin film business.
The company is trying to sell more than 1,100 digital- imaging patents, and is pursuing device makers for patent infringements, maintaining other businesses owe it royalty payments.
U.S. International Trade Commission Judge Thomas Pender said May 21 in a notice posted on the agency’s website that the patent is invalid. Kodak said it will appeal the findings with the six-member commission in Washington, which has the power to block imports of products that infringe U.S. patents.
A different judge at the agency found the patent valid and there’s been “strong interest” from potential buyers for Kodak’s portfolio, said Chris Veronda, a company spokesman.
“The full commission will make a ruling that’s favorable to us in the end,” he said.
The disputed patent, which Kodak says is used in all modern cameras, covers a feature that previews low-resolution versions of a moving image while recording still images at a high resolution. Higher resolution requires more processing power and storage space. Samsung Electronics Co. and LG Electronics Inc. have already paid $964 million in settlements to Kodak for using the technology.
Kodak contends Apple already owes it more than $1 billion in damages for infringement of this and other digital capture patents, according to a bankruptcy court filing this month.
The commission is scheduled to complete the investigation by Sept. 21. Kodak has other claims pending against HTC Corp., Fujifilm Holdings Corp. and Ricoh Co.
Kodak’s bondholders (EK:US) include the credit-investment arm of Blackstone Group LP and hedge funds Avenue Capital Group LLC, D.E. Shaw & Co. and David Einhorn’s Greenlight Capital Inc., according to a January court filing by Michael Stamer, their lawyer at Akin Gump Strauss Hauer & Feld LLP.
The unsecured notes due 2013 plunged to 16 cents on the dollar on the day of the decision, from 27 cents before the ruling, and declined to 14 cents on May 23, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Investors trade the debt of bankrupt companies as a bet on how much money will be distributed in the reorganization.
“It was always a speculative investment, but there’s much less recovery possible today given the ruling,” said Dinsdale, who changed his recommendation on the debt from “hold” to “sell” in a May 22 report.
The unsecured notes, along with $400 million of convertible bonds, rank below $750 million of secured bonds, Antoinette McCorvey, Kodak’s chief financial officer, said in a January court filing. The company also has a $925 million debtor-in- possession bankruptcy loan, which gets paid first, Hart said in his January filing.
Searching for Value
Kodak’s $500 million of 9.75 percent secured bonds due 2018 have dropped to 68.6 cents on the dollar from 81 cents on May 18, according to Bloomberg pricing data.
“There could be value for the second-lien holders,” said Randy Laufman, an analyst at investment bank Imperial Capital LLC in Los Angeles. “We don’t think there’s value for the unsecured bonds.”
The ruling may also hurt the value of the patents that Kodak is planning to auction, Dinsdale said. The company has until June 30 to file the patent-bidding procedures, which typically name the bidder preferred by the seller, also known as the stalking horse. The technology is valued at $2.21 billion to $2.57 billion, based on an estimate by 284 Partners LLC, a patent advisory firm hired by Kodak and cited in a January court filing.
“I don’t think the Street really believes those numbers,” Laufman said. “If anybody believed those numbers, those bonds wouldn’t be in the 60s.”
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