Kodak's 7% convertibles offer attractive risk-reward, income pickup versus equity: Barclays

By Rebecca Melvin

New York, Feb. 11 - Eastman Kodak Co.'s liquidity position has improved "meaningfully" as a result of refinancing transactions as well as success in enforcing its digital camera intellectual property (IP) through a settlement with LG Electronics and Samsung Electronics.

As a result, the company's balance sheet position is much stronger than it was last year, Barclays analysts Venu Krishna, head of equity-linked strategies, and Kannan Venkateshwar, a cross-asset strategy analyst, wrote in a research report.

"Its equity may have limited upside on account of operational improvements. However, we believe the equity could benefit substantially if the company is able to monetize its IP portfolio more meaningfully in the future," the analysts wrote Wednesday.

Kodak's 7% convertibles due 2017 were last seen at 109.375 versus a share price of $5.84, according to the Barclays report. On Tuesday, the 7% convertibles traded at 110.5 versus a share price of $5.95.

On the equity front, the Barclays analysts expect IP "monetizations to drive a greater part of upside in the stock relative to operational improvements guided to by the company over the near term."

However, assessing the value of the company's IP portfolio remains challenging. There is potential upside due to IP that could be substantial, and gaining exposure to this event or the company's operational turnaround through equity exposes investors to meaningful execution risks.

Therefore, the analysts recommend that investors who are long the Kodak equity swap into the Kodak 7% convertible bonds due 2017 as a risk-controlled investment.

Being long the bonds provides an attractive risk-reward profile of about 2:1 for a plus or minus 25% stock move. It also provides income pickup of 6.36% relative to the stock, a move up in the capital structure and breakeven in 4.3 years inside the 4.7 years of call protection, the analysts said.

For arbitrage investors, the analysts recommend a delta-hedged position in Kodak convertibles given the relatively stable credit, the high coupon and the potential to extract value from volatility due to execution risk.

"Although we consider the company to have a relatively stable balance sheet, its equity may have limited upside on account of operational improvements. However, we believe the equity could benefit substantially if the company is able to monetize its IP portfolio more meaningfully in the future. But gaining exposure to this opportunity through equity exposes investors to execution risk in the company's operations," the Barclays analysts wrote.

Kodak is a Rochester, N.Y.-based provider of imaging technology products and services to the photographic and graphic communications markets.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.