Cash Management

Kodak’s Credit Picture Is Poor: S&P

Cash concerns cause a bump down to a B- rating for the photo company.
Stephen TaubMarch 6, 2009

Standard & Poor’s has cut its ratings on Eastman Kodak Co., worried that the onetime photography giant is burning through cash.

The credit-rating agency lowered Kodak’s corporate credit rating to B- from B. It also removed the corporate credit rating from CreditWatch, where it was placed with negative implications in November. The outlook is now negative, S&P said.

“The downgrade reflects the company’s high rate of cash consumption and concern that its cash balance could quickly diminish if substantial negative discretionary cash flow generation does not abate,” said S&P credit analyst Tulip Lim.

S&P added that Kodak’s issue-level ratings remain on CreditWatch with negative implications, pending a review of the capital structure after the company addresses its covenant compliance on its secured credit facility with lenders. “We believe that the structure of the facility could change as a result of such discussions,” said Lim.

Gimme Credit pointed out in its own report that Kodak is scurrying to find cost reductions to offset a likely 15 percent revenue decline in 2009. “If they are not sufficient, the cash burn may be worse than expected,” the credit-research firm said. It pointed out, however, that Kodak entered the year with cash of $2.1 billion, which it says provides a cushion.

“Revenue and margins are declining while free cash flow, previously quite strong, has turned negative,” said Gimme Credit. “Restructuring charges continue to plague the company after several years of attempting to transform itself into a digital firm.” Even so, it assured that Kodak has sufficient liquidity in the near term.

Kodak is not the only high-profile company that S&P downgraded last week. Earlier, the ratings agency lowered its corporate credit rating on Ford Motor Co. to CC from CCC+. It also lowered the issue-level ratings on the company’s senior secured term loan, senior unsecured debt, and subordinated debt, while leaving the issue-level rating on Ford’s senior secured revolving credit facility unchanged. The counterparty credit ratings and issue-level ratings on Ford Motor Credit and FCE Bank remain unchanged, but the outlooks on Ford and Ford Credit are negative.

S&P said the downgrades follow the company’s announcement of a debt restructuring, which it considers to be a distressed exchange and “tantamount to a default.”

“Our downgrades today do not reflect an increase in Ford’s risk of bankruptcy in our view,” S&P assured. “We believe the risk will remain high for all three Michigan-based automakers for 2009 and 2010 because of the dismal state of industry demand and other industry problems, such as the potential for supplier failures.”

 

 

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