Fitch Ratings has revised Eastman Kodak Company’s rating outlook to Stable from Negative. The Stable Outlook reflects Kodak’s improved near-term liquidity and financial flexibility. However, Fitch still expects “significant top-line and operating profit deterioration in all of Kodak’s businesses through at least 2009 due primarily to the global economic downturn”, and believes that “growth and margin expansion in Kodak’s digital businesses necessary to offset the rapid secular decline in the high margin traditional film business will remain challenging”.

Fitch Press Release

Fitch Revises Kodak’s Outlook to Stable; Affirms Ratings

NEW YORK—(BUSINESS WIRE)—Fitch Ratings has revised Eastman Kodak Company’s (Kodak) Rating Outlook to Stable from Negative and affirmed the ratings subsequent to the company’s disclosure of $700 million of anticipated gross proceeds from debt issued via private placements. Fitch has affirmed Kodak’s ratings as follows:

—Issuer Default Rating (IDR) at ‘B-’;

—Senior secured revolving credit facility (RCF) at ‘BB-/RR1’;

—Senior unsecured debt at ‘B-/RR4’.

Fitch expects to rate the company’s proposed $400 million unsecured convertible note ‘B-/RR4’.

The Stable Outlook reflects Kodak’s improved near-term liquidity and financial flexibility, assuming the company completes the debt offerings as proposed and utilizes a portion of the proceeds to tender for $575 million of convertible senior unsecured notes at par, which mature in 2033, although Fitch expects these notes will be put to the company in 2010. Although Fitch anticipates Kodak to generate cash in the second half of 2009 due to the seasonality of the company’s free cash flow profile, full-year 2009 cash usage is expected to approximate $300 million-$400 million, with further cash usage in the first half of 2010. As a result, a successful tender of the putable notes partially alleviates Fitch’s liquidity concerns, given the company’s $1.2 billion pro forma cash position and minimal debt maturities of approximately $40 million - $50 million through 2013, with the next significant maturity, consisting of $500 million of notes, occurring in 2013.

Kodak intends to obtain $700 million of debt financing, including i) $300 million of notes due 2017 from Kohlberg Kravis & Roberts Co. L.P. (KKR), which will be secured by a second lien on the collateral that secures the revolving credit RCF, and which will pay 10.0% cash interest and 0.5% PIK interest; and ii) a $400 million 7.0% convertible senior unsecured note due 2017. Residual proceeds after the tender offer will be used for general corporate purposes. KKR will also receive warrants to purchase 40 million shares of Kodak stock, which represents 14.9% of the current shares outstanding.

Liquidity on June 30, 2009 consisted of approximately $1.1 billion of cash and cash equivalents and an undrawn asset-based $500 million senior secured RCF (approximately $131 million letters of credit outstanding). The capacity is based on the company’s borrowing base consisting of designated percentages of eligible receivables, inventory, real property and equipment. Financial covenants under the amended facility include a minimum $250 million of U.S.-based cash, as well as a minimum 1.1 times (x) fixed charge coverage ratio in the event that excess availability is below $100 million. As of June 30, 2009, approximately 25% of RCF capacity matures in October 2010, with the remainder maturing in March 2012.

The ratings continue to reflect the following:

—Expectations for significant top-line and operating profit deterioration in all of Kodak’s businesses through at least 2009 due primarily to the global economic downturn.

—Fitch’s belief that growth and margin expansion in Kodak’s digital businesses necessary to offset the rapid secular decline in the high margin traditional film business will remain challenging.

—Fitch’s expectations that the company will not generate positive annual free cash flow until 2011 due to lower revenue and operating profit and cash restructuring payments.

—As anticipated, credit metrics weakened significantly in the first half of 2009 due to profitability declines, and Fitch expects moderate further weakening in the second half due largely to incremental debt associated with the transaction and increased interest expense. Fitch estimates leverage (total debt/operating EBITDA) was 4.6x at June 30, 2009, compared with 2.5x at year-end 2008. Interest coverage (operating EBITDA/ gross interest expense) declined to 2.7x from 4.7x in the same period.

Negative rating actions could occur if:

—The announced transactions do not close as planned.

—Free cash flow over the next several quarters is significantly below Fitch’s expectations, resulting in a substantial reduction in cash balances;

—Kodak’s financial results deteriorate beyond Fitch’s expectations.

Positive ratings actions could occur if:

—Kodak experiences a return to top line growth and ongoing annual free cash flow generation.

Pro forma for the transaction, Fitch estimates total debt of approximately $1.4 billion at June 30, consisting primarily of: i) $500 million senior notes due 2013; ii) $300 million second-lien secured notes due 2017; and iii) $400 million unsecured convertible notes due 2017, and iv) approximately $200 million of various term notes with maturities between 2006-2013.

The Recovery Ratings (RR) reflect Fitch’s belief that Kodak’s enterprise value would be maximized in a liquidation, rather than a going-concern, scenario. In estimating liquidation, Fitch applies advance rates of 80%, 20%, and 10% to Kodak’s accounts receivables, inventories, and property, plant, and equipment balances, respectively. Fitch arrives at an adjusted reorganization value of $1.3 billion after subtracting administrative claims. Based upon these assumptions, the ‘RR1’ for Kodak’s secured bank facility reflects Fitch’s belief that 100% recovery is realistic. Pro forma for the new second lien and unsecured debt, Fitch estimates that the unsecured debt would recover between 31%-50% of its value after the second-lien secured notes were repaid. This supports the ‘RR4’ for the senior unsecured debt.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.

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