Kodak to Raise $700 mln

Yesterday, Eastman Kodak Co. (EK) said that it expects to raise $300 million through convertible senior notes. This includes Kohlberg Kravis Roberts & Co. L.P.’s (KFN - Snapshot Report) commitment of buy another $400 million senior secured notes due 2017.

Kodak also agreed to issue to KKR warrants to purchase up to 53 million shares of its common stock. The company may at its discretion issue as few as $300 million senior secured notes to KKR, thus adjusting the number of shares underlying the warrants to 40 million, with the actual number of warrants prorated on the final amount of notes purchased. Under terms of the agreement, KKR is required to hold the warrants and shares issued upon exercise of the warrants for a minimum of 2 years.

Kodak plans to offer $300 million convertible senior notes due 2017 in a private placement to institutional buyers. It will use net proceeds from both these debt issues to repurchase up to $575 million worth of its 3.375% convertible notes due in 2033. Any excess proceeds will be used for general corporate purposes.

We believe the move will strengthen Kodak’s balance sheet and free up capital for core investments, which in turn will reinforce its business. In July, the company had posted its third consecutive quarterly loss as the global economic downturn hurt sales of digital cameras, film and other photography products.

Kodak expects its 2009 loss from continuing operations to be at the low end of its forecast range of $200 million to $400 million. It is targeting digital sales growth of 1% to 3% but overall revenue is expected to decline by 4% to 6% in the second half of the year. Thus, we reiterate our Underperform rating on the stock.

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