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Rating Action:

Moody's Lowers Kodak's CFR and PDR to B3 from B1. Outlook Negative

10 Feb 2009

$2.1 Billion of Debt Securities Affected

New York, February 10, 2009 -- Moody's Investors Service lowered Eastman Kodak Company's (Kodak) corporate family rating to B3 from B1. The rating outlook is negative. The rating action reflects Moody's expectations that Kodak's profitability and cash flow will remain under pressure as a result of the sharp downturn in demand combined with the secular decline in its traditional film business, and the challenges in attaining profitability in its digital business portfolio. The negative outlook also incorporates Moody's concern that Kodak's liquidity position will weaken over the forward rating horizon.

As a result of the deteriorating demand environment and intense competitive pressures, Moody's expects that Kodak's consumer digital segment, which includes digital cameras and inkjet printers and represents $3.1 billion or 33% of total revenue, will continue to lose money in 2009. In 2008, the segment lost $177 million.

Kodak's graphic communications business (about $3.3 billion or 35% of revenue) is being pressured by declining print demand related to the weak spending on advertising and other printed output, as well as the tight credit markets that are making it difficult for its commercial customers to secure financing for new equipment purchases. Given the potential for a further deterioration in these macro drivers, Moody's believes that the segment could operate at a loss in 2009 as compared to the $31 million of segment profit in 2008.

While profitable, the company's traditional film business (FPEG), which includes consumer film and photofinishing as well as entertainment imaging, continues its secular decline. Although management continues to take aggressive actions to reduce the cost structure of FPEG ahead of the deteriorating revenue base in order to stabilize operating margins, overall profitability declined by nearly 30% to $196 million in 2008. Overall, FPEG's deteriorating profit contribution will place increasing pressure on the entire company as management strives to achieve or maintain profitability in the intensely competitive consumer digital sector and the currently challenged graphics communications business.

Kodak's $2.1 billion of cash and equivalents continues to provide it with good liquidity at a sufficient level to contend with expected operational challenges in 2009. As a result, the company's SGL-2 rating has been maintained. The negative rating outlook reflects, in part, Moody's concern that Kodak's liquidity position will weaken throughout the year and into next year, nonetheless. We expect that the company could consume between $400 million and $700 million of cash during the year as a result of reduced profitability, cash restructuring outlays of $250 million to $300 million, as well as the current common dividend payment program. Common dividends totaled $139 million in 2008 and are paid in the second half of the fiscal year. To date, the board of directors has not decided to alter or eliminate the dividend. While there are limited debt maturities in 2009 ($50 million in September 2009), Kodak will notably need to address a put of its $575 million senior convertible note in October 2010.

Additionally, the company is in the process of renegotiating its existing $1 billion secured revolving credit facility. Although the company is in compliance with covenants at December 31, 2008, Moody's does not expect the company to maintain compliance in the first quarter of 2009 as a result of (1) weak performance in the second half of 2008, (2) first half seasonality in 2009 that will be exacerbated by weak demand environment, and (3) additional cash restructuring charges, which are included in the current covenant definition. The company is currently in negotiations with its bank group to amend or establish a new facility. While the company has not historically relied on its revolver other than for letters of credit (about $130 million), Moody's believes it is very important to maintain as much financial flexibility as possible given the operational and financial challenges facing the company over the near- to intermediate-future. To the extent that the company is not able to amend the bank facility, ratings may come under further downward pressure.

Ratings lowered include:

Corporate Family Rating to B3 from B1;

Probability of default rating to B3 from B1;

$1 billion 5 Year Secured Revolving Credit Facility, to Ba3 from Ba1; LGD2, 20%;

$500 million Senior Unsecured Notes due 2013, to Caa1 from B2; LGD5, 75%;

$3 million Senior Unsecured Notes due 2018, to Caa1 from B2; LGD5, 75%;

$10 million Senior Unsecured Notes due 2021, to Caa1 from B2; LGD5, 75%;

$575 million Senior Unsecured Convertible Notes due 2033, to Caa1 from B2; LGD5, 75%

Moody's most recent rating action for Kodak was on December 12, 2008 when ratings were placed under review for possible downgrade.

The principal methodology used in rating Kodak was Moody's Global Technology Hardware Industry rating methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory (September 2007, document #104890).

Eastman Kodak Company, headquartered in Rochester, N.Y., provides imaging technology products and services to the photographic, graphic arts commercial printing, consumer digital, and entertainment imaging market. Kodak reported $9.4 billion in revenue for the fiscal year December 2008.

New York
Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Lowers Kodak's CFR and PDR to B3 from B1. Outlook Negative
No Related Data.
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