Kodak adds on bankruptcy filing but now trades flat; solar names resist negative news

By Rebecca Melvin

New York, Jan. 19 - Eastman Kodak Co.'s convertibles added about 2 points on Thursday to about 29 amid a slump in the underlying shares after the Rochester N.Y.-based digital photography company announced that it filed for Chapter 11 bankruptcy protection from creditors.

The 2-point improvement in the Kodak convertibles, garnered supposedly from adjusted recovery expectations, canceled out, however, because the bonds are now trading flat, or without accrued interest, which equated to about 2.25 points of value, traders said.

"It's trading flat now, so it's pretty much a wash," a New York-based trader said.

Also in the distressed arena, solar names resisted negative news Thursday that Germany, the world's largest market for solar panels, said it is switching to monthly subsidy cuts from annual subsidy cuts, which will slow demand for panels more rapidly.

Solar equities slumped on the news, but Suntech Power Holdings Co., the biggest solar panel maker, saw its 3% convertible due 2013 gain 1.5 points to 59 bid, 60 offered by the close. Meanwhile, SunPower Corp. was essentially unchanged, according to a New York-based trader.

Elsewhere, Knight Capital Group Inc. jumped outright and was seen improved on a hedged basis after the Jersey City, N.J.-based trading and financial services company reported fourth-quarter earnings that were well above estimates.

Synnex Corp.'s 4% convertibles due 2018 were seen 0.25 point better by one trader, who quoted the paper at 131 versus an underlying share price of $35.82. But a second trader said the Synnex paper was unchanged on a dollar-neutral basis at 130.5 versus an underlying share price of $35.71.

Overall, better credit markets and better equities spelled strength for the convertible bond universe.

"Convertibles remain well bid," a sellside market source said. "Guys are adding to positions and in some cases adding new names. High yield has caught up after lagging the equity market, and converts have been caught in the updraft."

In equity markets, the Dow Jones industrial average ended higher by 46 points, or 0.4%, at 12,625.19; the Nasdaq stock market gained 18.6 points, or 0.7%, to 2,788.33; and the S&P 500 stock index gained 6.5 points, or 0.5%, to 1,314.50.

After the close of markets, Microsoft Corp. reported fiscal second-quarter earnings that beat profit estimates despite a weak market for personal computers.

The Redmond, Wash.-based software giant saw revenue decline for its Windows operating system division, but the shortfall was more than made up for by gains in its business, server, Xbox 360 and online services units.

Net income was $6.62 billion, or 78 cents a share, compared to $6.63 billion, or 77 cents a share, in the year-earlier period. Revenue rose to $20.89 billion but didn't exceed expectations.

Analysts expected earnings of 76 cents per share on revenue of $20.92 billion. Shares were flat to lower in after-hours action.

Kodak improves on filing

Kodak's 7% convertibles due 2017 traded between 28.5 and 29.5 on Thursday and were last seen at 27.75 bid, 29.25 offered after filing for bankruptcy protection. That was up from 26 ish bid, 27 offered on Wednesday.

The paper was up a couple of points but is now trading flat, or without accrued interest, which negated the point climb, traders said.

Last week, the Kodak convertibles moved up to 28 from 26 on a 50% surge in the underlying shares on news that the company was restructuring into two divisions. This move was sans a stock increase.

But trading in the Kodak convertibles wasn't as vigorous as some expected on such big news as a bankruptcy filing, one trader said. "I expected more," he said.

The trader said that the reason that the convertible paper, which is a subordinated, unsecured security, didn't "get hammered," and go to zero was because the consultant hired to help Kodak sell its portfolio of digital photography patents valued the portfolio at $2.25 billion to $2.5 billion.

"It's the same consultant that worked on the Nortel patent unwind so some people see significant upside," the trader said.

A second source, CRT Capital Group LLC's senior analyst Amer Tiwana, said in a note published Thursday, "We believe that the level of recovery for the unsecured notes is a function of the eventual realized value of the patent portfolio.

"The unsecured notes trading at 28% of par imply a valuation of $1.2 billion for Kodak's patent portfolio. We do not have a strong view as to whether that represents fair value for the patent portfolio. Street estimates have recently ranged from $1.0 billion to $2 billion for Kodak's digital patent portfolio."

Tiwana went on to say that Kodak's senior unsecured 2013 straight notes and the 2017 convertible notes rank pari passu, according to his reading of the indentures.

"The two issues represent the bulk of the $663 million in senior notes outstanding at this level of the capital structure" and at a price of about 28 it implies a value on the patents of about $1.2 billion, Tiwana wrote.

By means of comparison, Tiwana mentioned the Nortel patent portfolio sale as a reference point. "Nortel sold its 6,000 patents in bankruptcy for $4.5 billion, implying a valuation of $750,000 per patent. A similar valuation would yield a value of $825 million for Kodak's digital patent portfolio of 1,100 patents."

"Kodak does however have another 10,000 patents, which it has accumulated over the course of the last 130 years, which may or not be relevant from a valuation standpoint," Tiwana wrote.

Kodak's Chapter 11 filing is intended to allow it to reorganize around its printers and ink division, and to sell its photo patents, according to the company.

Given that the company has had only one profitable year since 2004, the bankruptcy wasn't a real surprise. And the company said late last year that if it didn't sell the patent portfolio it would run out of cash by the end of this year.

The company has secured $950 million in debtor-in-possession financing from Citigroup Inc. and expects to be able to operate its business during bankruptcy reorganization and pay employees.

On its website, Kodak assured customers that the DIP loan is sufficient to pay vendors, suppliers and other business partners in full for goods and services going forward.

Kodak had about $5.1 billion of assets and $6.75 billion of liabilities at the end of September.

Knight Capital gains

Knight Capital's 3.5% convertibles due 2015 were seen last at 95.5 bid, 96.5 offered, which was up more than 4 points. The paper traded earlier at 95.25, which was up 3.9 points from Wednesday.

On Tuesday, a trader referenced a dealer purchase of the Knight convertibles at 91.375 versus a share price of $11.90, and in mid-December, Knight Capital paper traded at just under 90 versus an underlying share price of $11.85 on a 45% delta.

Knight shares ended the day up $1.20, or 10%, at $13.05.

One trader said the paper looked improved on a dollar-neutral basis.

The provider of market-access and trade-execution said a jump in trading activity boosted its quarterly results.

The company earned $40.2 million, or 43 cents per share, compared to $9.2 million, or 10 cents per share, in the year-earlier period. The most recent quarter and previous quarter included tax gains equivalent to 2 cents per share. Revenue jumped 31% to $341.3 million from $259 million.

Analysts most recently expected earnings of 25 cents a share on revenue of $313 million.

Average daily U.S. equity trades rose 20%, as the average dollar value of those trades rose 11% to $27.3 billion, the company said.

Mentioned in this article:

Eastman Kodak Co. NYSE: EK

Knight Capital Group Inc. NYSE: KCG

Microsoft Corp. Nasdaq: MSFT

SunPower Corp. Nasdaq: SPWR

Suntech Power Holdings Co. NYSE: STP

Synnex Corp. NYSE: SNX

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