Randomly Noted

Once upon a time when people talked about Kohlberg Kravis Roberts, you thought of takeovers – some hostile and some friendly. The business has certainly changed and even more so by the credit crisis over the past year. Today, KKR essentially played the role of lender, if not of last resort, pretty close to it.

KKR agreed to loan Kodak up to $400 milli0n and along with the between 10% and 10.5% annual interest KKR receives for 8 years, it gets warrants to purchase up to nearly 20% of Kodak. This deal shows how difficult times have become for Kodak. Not only is it paying a higher interest rate on the loan, but it looks like it is a pay-in-kind loan – meaning Kodak doesn’t pay KKR cash interest but instead, new securities. So, the principal it owes when these bonds come due will balloon. Payment on these bonds become tomorrow’s headache, not today’s.

And shareholders will love this one – the warrants to buy 53 million new shares will not only dilute current holders, but KKR’s warrant allows them to buy the stock at a maximum price of $5.50 – the stock closed today at $6.68.  (KKR can’t exercise the warrants for two years but you usually see these things exercise at a premium to where the stock currently trades, not a discount.)

Kodak will sell a separate convertible bond offering (in another private placement that will further dilute existing shareholders) and use proceeds to retire convertible bonds due 2033 that pay interest at 3 3/8%. Yes, you read that correctly. Kodak is raising funds that will cost it more than 10% a year to retire much cheaper paper that yields 3 3/8%.

Why?

The bonds it wants to retire have a “put” feature that allows holders to demand the company on Oct. 2010 to buyback their bonds. Kodak can’t risk not being able to repay those bonds (about $575 million outstanding). So, it hopes to raise  the money now.

Kodak got a waiver from its banks to let it raise up to $700 million (these two new bond offerings) and would like to use the remainder of the proceeds for general corporate purposes.

Kodak has been hurt with the best of them during this recession. Sales in the most recent quarter fell 29%. Kodak’s cash position has weakened. It had $1.1 billion of cash on hand as of June 30, down from $2.145 billion at the end of last year.

Kodak is buying some extra time with this KKR transaction. But it comes at a very steep cost to the company and its shareholders.