Investors last week carped about the pricing on Citigroup's $2.7 billion deal for Eastman Kodak and some said they would pass on the deal, but a Citigroup banker said it is going well and pricing will not be increased. Investors eschewing the deal said the coupon wasn't high enough for the risk they associated with a company facing the challenges of an ever-changing digital imaging market.
The credit consists of a five-year, $1.2 billion revolver, a seven-year, $1 billion term loan and a $500 million delayed-draw term loan. Pricing is LIBOR plus 1 1/2% on the revolver and LIBOR plus 1 3/4% on the term loans. The revolver replaces the company's existing five-year credit set to expire in July 2006 and the term loans will be used to repay existing company debt related to the acquisition of Creo, which was completed June 15, according to a filing with the Securities and Exchange Commission. The deal has not been publicly rated, but investors were anticipating a Ba2 or Ba3.
"They made it easy for us to say 'no' because they didn't put a big whopper coupon on it," one investor said. "If they put a bigger coupon on it, there is the greed factor, but at 175? [But] we still wouldn't touch it at 350." Another investor concurred. "When the 175 price talk came out, I didn't see the risk-reward feature," he said. "I'd rather buy another highly rated credit with a low spread I can put in my portfolio and sleep at night and not have to worry about it."
Some investors are not worrying about it. A Citigroup banker said the deal is chugging along and will close at the end of the month. "The deal is going fine, we have a number of commitments in and fully expect the deal to be well oversubscribed," the banker said. One investor whose firm committed to the deal acknowledged the challenges Kodak faces in going digital, but was not put off by the price. "We didn't think that that pricing is that crazy given the ratings," he explained, noting that the deal is a "liquid, well rated loan in a market desperate for paper. I think it tends to get done at that price."
Investors cited the large acquisition Kodak just completed and some are worried about the integration risk, along with the company's movement from the traditional print business to the new digital age. "The argument that management was trying to make throughout the presentation was that Kodak has a tremendous brand name and recognition, and the company should be able to, or has been able to, take the Kodak brand name and throw it onto digital devices and be successful, and I question that," he said. A Kodak spokesman would not respond to those remarks. "As a matter of practice we do not comment on our conversations with outside parties, nor do we comment on thoughts and opinions of others," he said.
Moody's Investors Service downgraded the company's corporate family rating to Ba2 from Ba1 in July and downgraded its senior secured rating to Ba3 from Ba1 and put both ratings on review for further possible downgrade. In its report, Moody's writes that cash outflows related to restructuring are anticipated to be about $600-650 million in 2005, up from $480 million in 2004.
