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TheStreet Open House

Kodak's Bankruptcy: Manufacturing a 21st Century Rebirth

Stock quotes in this article: BX, SFLY, MMM, XRX, AAPL

It Could Have Been Worse

Kodak received sub-par demand for its patent portfolio and it sold Kodak Gallery to Shutterfly (SFLY) for a paltry $23.2 million. But a turning point in Kodak's bankruptcy process came when the company sold its personalized camera film and document imaging businesses to its U.K. pensioners.

The deal was announced in late April and resolved $2.8 billion in pension liability, Kodak's largest creditor claim. Kodak received about $325 million of cash and other benefits worth about another $325 million from the U.K. pension and ceded full control of what was once the company's pre-eminent cash cow.

"That was a real bright spot in the reorganization process," said a source involved with Kodak's bankruptcy. The Wall Street Journal reported that the deal was being negotiated prior to Kodak's bankruptcy filing, and throughout the Chapter 11 process.

Those $2.8 billion in pension claims had threatened to keep Kodak in a prolonged bankruptcy, potentially creating a roadblock for the company's re-emergence.

Within a few months of the deal's approval in bankruptcy court, Kodak set up a rights offering backstopped by its second-lien creditors GSO Capital Partners, a subsidiary of The Blackstone Group (BX), BlueMountain Capital Management, George Karfunkel, United Equities , and Contrarian Capital. The company also arranged a $895 million exit financing commitment from JPMorgan (JPM), Bank of America (BAC) and Barclays (BCS).

Many, especially Kodak's over 50,000 U.S.-based retirees, have faced stiff losses through the company's bankruptcy.

About a month after Kodak filed for Chapter 11, for example, the company said it would terminate its non-pension retiree benefits. Those benefits, made when the company was renowned for its generosity to employees, included health and dental insurance, survivor income benefits and life insurance. They represented a total of about $1.2 billion in liability on Kodak's balance sheet.

"Bankruptcy can have a particularly painful effect on retirees," U.S. Bankruptcy Court Judge Allan Gropper said in court.

The company shifted course when it formed a committee to represent retirees through the bankruptcy process.

A Kodak retiree committee was able to get $7.5 million from the company, a commitment of $15 million in cash upon its exit from bankruptcy and an unsecured bankruptcy claim amounting to about $635 million, which it sold to undisclosed parties for about $70 million.

All told, the committee was able to get about 10-cents for every $1 in benefits Kodak owed its retirees, and was able to subsidize some COBRA benefits for retirees who were not yet eligible for Medicare. Kodak also set up a voluntary employee benefit program to cover a small portion of previously guaranteed survivor income benefits.

At a series of December town hall meetings to explain the committee's recovery, R. Scott Williams, an attorney at Birmingham, Alabama-based Haskell Slaughter Young & Rediker, faced many tales of hardship and loss from retirees.

Retired employees spoke of colleagues who were forced to sell their homes to help pay for lost benefits, or the loss of thousands of dollars in life insurance payments.

"I hate the result," Williams said of the recovery, in a telephone interview. "The company simply wasn't able to meet its promises and obligations," he added. Still, Williams said the retiree committee gave workers a voice in Kodak's bankruptcy process and garnered a recovery that was the best possible result, given the circumstances.

"Retirees took a big hit, there was no question," Arthur Roberts, President of the Kodak Retired Employees Beneficiary Association, said in a telephone interview.

Roberts advocated on behalf of pensioners and helped to create the retiree committee. He says that while retirees' recovery of non-pension benefits was small, the expectation in Rochester is that a healthy Kodak will be able to maintain the entirety of over $4 billion in pension commitments.

While Roberts says Kodak's retirees got taken advantage of in bankruptcy given their small recovery compared with note holders, he adds "the general mood is we understand what happened. We are sucking it up and live with it. We want Kodak to be successful."

Read Part 3 of Kodak's Fading Moment: "Rochester's Rise Amid Kodak's Demise"

Read Part 1 of Kodak's Fading Moment: "Kodak: The End of an American Moment"

-- Written by Antoine Gara, with Joe Deaux in Rochester, N.Y.

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