The Nasty Surprise From Eastman Kodak

Investors should be used to new financings being announced after major stock surges. Last week’s surge in shares of Eastman Kodak Co. (NYSE: KODK) took shares from $8 to over $50, but there was already some controversy about moving ahead of the news. Now all those investors who were buying into the hype that Kodak will be a major player in making materials for generic drugs with a big government loan are being reminded just how chasing news pops in companies with a tarnished past can be.

A filing with the Securities and Exchange Commission disclosed that Eastman Kodak received conversion notices on July 29, 2020, from noteholders of its 5% secured convertible notes due in 2021 that the holders were exercising their rights to convert a $95 million of the notes into common shares. These noteholders included Longleaf Partners Small-Cap Fund, C2W Partners Master Fund Limited and Deseret Mutual Pension Trust.

According to that filing, the conversion date of the converted notes was July 29, 2020, and the company is obligated to deliver a total of 29,922,956 common shares within five trading days after the conversion date. Kodak’s filing indicated that it expects to issue the conversion shares on August 3 (Monday).

The filing also disclosed that the company will now have 75,494,534 issued and outstanding common shares, and Kodak does not plan to exercise its right to pay the $5.6 million of accumulated interest on the converted notes in additional shares of common stock. Kodak is instead making that payment in cash and the prior note obligations will be fully discharged. The remaining outstanding principal amount of the notes will now be just $5 million.

Most stocks do not react well to a sudden influx of shares on the market. That is particularly the case when the shares jump from roughly $8 to a well over $50 in short order.

An issue that 24/7 Wall St. could never get past when it was covering the crazy move higher was Kodak’s troubled past acting as a potential major drag on its future. That is no assurance at all, but many companies that find themselves in long periods of erosion can stay that way even under better circumstances in the future. The company’s leadership may not be the same as before it went into bankruptcy protection, after years of mismanagement and not adapting to industry trends in time, and new and existing shareholders better hope that the current management doesn’t call the prior management for advice.

The value of that new 29.9 million post-conversion shares would be more than $450 million at the current share price, and that’s not even considering how much higher this stock was back on the July 29 date. Not a bad return on $95 million in face value debt.

The current trend on major corporate news is creating frenzies into a stock, followed by frenzies on the painful way out. Panic in, panic out!

Eastman Kodak shares were down a sharp 26% at $16.06 on Monday afternoon, after having closed at $21.85 on Friday.

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