The Deal: Kodak Case Done Developing

NEW YORK ( The Deal) -- Roughly 19 months after entering Chapter 11, former photography giant Eastman Kodak ( EK) is headed out of bankruptcy protection.

Judge Alan Gropper of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Tuesday, Aug. 20, verbally confirmed the company's reorganization plan.

"I am very cognizant of the fact that Kodak is one of the oldest and best-known names in American business, which for many years has employed thousands and in which many have invested," Gropper said in court. "Its decline and bankruptcy is a tragedy of American economic life."

He later added, "let us take a moment to dwell on the future and the hope that the business that Kodak will be continuing in will be successful."

Debtor counsel Andrew G. Dietderich of Sullivan & Cromwell told the court "all five classes entitled to vote approved the plan by a healthy margin."

Gropper overruled several objections to confirmation from parties including U.S. Trustee Tracy Hope Davis, a shareholder and a group of retirees.

Davis had taken issue with future emergence awards for certain Kodak executives included under the plan.

A group of 11 retirees had asserted that they were entitled to an administrative claims, which the judge has also rejected.

Finally, a shareholder appeared before the court to add to testimony made by other equity holders at an Aug. 5 hearing. The shareholders questioned Kodak's valuation of its business, asserting they were entitled to a recovery.

"I cannot decree a larger payment for creditors or any payment to shareholders if the value is not there, and there is no evidence that there is," Gropper said at the hearing.

Dietderich said the company hopes to emerge from bankruptcy as early as Sept. 3.

"Staying in bankruptcy is costly on many levels, and we are hoping to emerge as soon as possible," Dietderich said.

Dietderich explained during the hearing that Kodak initially intended to resolve several objectives during its bankruptcy, including capitalizing its business appropriately, receiving the highest value for its intellectual property, resolving its legacy debt and refocusing on the more valuable aspects of its business.

During the case, Kodak sold off various assets.

Most recently, Kodak on June 20 won permission of a settlement that will transfer the debtor's personalized imaging and document imaging businesses to the U.K. Kodak Pension Plan for $650 million. The deal, included in Kodak's reorganization plan, also will resolve some $2.8 billion in claims.

In another key deal, Kodak on Feb. 1 closed the $527 million sale of a patent portfolio to Intellectual Ventures Fund 83 LLC, an affiliate of Intellectual Ventures Management.

"We are a very different company than the one in the public image ... or even the one that filed for bankruptcy," Dietderich said, adding that the new business model, with a focus on its commercial and packaging printing, is profitable.

According to Dietderich, 15% of the equity in the reorganized company will be distributed through the plan, while the other 85% will go to rights offering participants.

Dietderich said about 40 million shares were sold under the rights offering, with the entire solicitation bringing in about $406 million.

GSO Capital Partners will own about 20% of the equity and BlueMountain Capital Management 18%, with smaller investors comprising the remainder. GSO (50.74%), BlueMountain (12.32%), George Karfunkel (12.32%), United Equities Group (12.32%) and Contrarian Capital Management (12.32%) had agreed to backstop the rights offering.

Dietderich said Kodak's final funded capital structure would include the $406 million in new equity capital and $695 million in term debt, with the latter receiving a AA3 credit rating from Moody's Investors Service.

Kodak's exit financing comprises two term loans and a $200 million revolver.

JPMorgan Chase Bank ( JPM), Barclays Bank ( BCS), Bank of America ( BAC), Merrill Lynch, Pierce, Fenner & Smith and JPMorgan Securities are the arrangers of the exit financing.

The financing package includes a $420 million six-year senior secured first-lien term loan, a seven-year $275 million senior secured second-lien term loan and a $200 million asset-based revolver that matures five years from closing.

The arrangers have agreed to backstop $130 million of the revolver, with $60 million coming from BofA and $35 million each from Barclays and JPMorgan.

While the interest rate and fees were redacted in court documents, Kodak said it must pay $3.5 million in commitment fees, as well as up to $250,000 for expenses, in connection with the revolver. An additional $21.8 million in fees plus $150,000 for expenses are attached to the term loans.

Documents show the loans must close by Dec. 31.

Kodak will use the financing to repay its second-lien noteholders, owed $395 million, in full.

The debtor's two unsecured creditor classes--general unsecured creditors, owed $2.6 billion, and retiree settlement unsecured creditors, owed $635 million--received the chance to participate in the rights offering plus the remaining 15% of stock, warrants and certain distributions from a trust. Kodak estimated a recovery between 4% and 5% for these classes.

Administrative claims, $14.5 million in priority claims, $34.7 million in secured claims and the balance on a $200 million debtor-in-possession revolver led by Citigroup Global Markets will be paid in full on the plan's effective date.

The $700 million term loan portion of Kodak's original DIP was repaid through an $843.65 million replacement DIP term loan from second-lien lenders. The exit financing will repay the latter loan.

Convenience creditors, owed $7.8 million, will receive 4.5% of their claims, so long as that did not exceed $600,000 in cash.

Subsidiary convenience creditors, owed $300,000, will be paid in full in cash.

Equity holders will be wiped out.

Debtor counsel said the company has established a claims reserve of $1.8 billion.

According to Dietderich, the company believes some of the claims may be speculative, and Kodak may request to decrease the reserve at a Sept. 16 hearing.

Founded in 1880 by George Eastman, Kodak was once the world's leading producer of film and cameras.

Since it filed for bankruptcy on Jan. 19, 2012, the Rochester, N.Y., company has sought to reposition its business to focus on commercial, packaging and functional printing solutions and enterprise services.

John J. Jerome, Michael H. Torkin and Mark U. Schneiderman at Sullivan & Cromwell and Pauline K. Morgan and Joseph M. Barry at Young Conaway Stargatt & Taylor are also debtor counsel.

James A. Mesterharm of AlixPartners is Kodak's chief restructuring officer. David Descoteaux of Lazard is Kodak's investment banker.

Peter V. Pantaleo of Simpson Thacher & Bartlett represents GSO. Thomas Moers Mayer and John Bessonette of Kramer Levin Naftalis & Frankel are counsel to BlueMountain and Contrarian Capital. Adam L. Shiff of Kasowitz, Benson, Torres & Friedman represents Karfunkel and United Equities.

Jonathan Helfat of Otterbourg, Steindler, Houston & Rosen and Sandy Qusba of Simpson Thacher & Bartlett are counsel to the exit lenders.

Brian M. Resnick of Davis Polk & Wardwell represents Citigroup.Dennis Dunne heads a Milbank, Tweed, Hadley & McCloy team that represents the official committee of unsecured creditors.

Katie Banks, John H. Booher, Elizabeth M. Donley, Christopher R. Donoho III, Derek B. Meilman and Michael J. Silver of Hogan Lovells are counsel to KPP.

Written Kelsey Butler

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