News analysis: Purchasing assets from insolvent sponsors could become more common for schemes looking to secure member benefits, according to lawyers working on the Kodak case.
Trustees of the Kodak Pension Plan have this week finalised the purchase of Eastman Kodak Company’s personalised imaging and document imaging businesses, valued at $650m (£416.17m), after US-based EKC emerged from bankruptcy last month. The acquisitions will be owned by a new entity named Kodak Alaris.
The purchase would help them sell the businesses and deal with their biggest unsecured creditor
The offload will help EKC streamline its business but crucially will provide KPP with cash flow-generative assets from which to pay members’ benefits.
Pensions Week reported in June that Kodak’s scheme members were invited to vote on their future within the plan.
Ross Trustees’ Andrew Bradshaw, acting on behalf of KPP, said scheme members had voted “overwhelmingly in favour” to stay in the scheme under the new sponsor, with the remaining members going into the Pension Protection Fund.
How the scheme’s £1bn assets are to be split between the new scheme and the PPF will be decided over the next few weeks, he added.
The deal
KPP had $2.8bn of legal claims against EKC and its solvent UK subsidiary Kodak Ltd. These claims have since been withdrawn as part of the acquisition – a move that meant the scheme had to pay only $325m for the two businesses.
Katie Banks from law firm Hogan Lovells, who was lead partner on the case, said the deal was mutually beneficial as the cash raised from the sale helped EKC emerge from bankruptcy and created an alternative route to settle the scheme’s claim – which at the time threatened the solvency of Kodak’s UK subsidiary.
“We realised that it would solve two problems for [EKC]; one, it would help them sell the businesses and two, it would deal with their biggest unsecured creditor,” she said.
The law firm was involved in the UK Coal debt-for-equity swap last year in which trustees took the property portfolio off the employer in return for releasing certain claims. “And it does seem to be an option that can make both parties happy,” Banks said.
The Pensions Regulator issued a statement in which it said the Kodak deal “best balances the needs of members, the PPF, the company and its employees” but added there are still “monitoring a governance arrangement” to be resolved.
Simon Kew, director of pensions at Jackal Advisory, said trustees should have a robust and clearly identifiable system for monitoring the strength, value and profitability of the two companies they have acquired.
“If I owe you £20 [and] don’t have the cash to pay you back now, but I offer you an asset to keep hold of until I give you the £20, you’d want to make sure that asset will continue to be worth at least £20,” he said. “The regulator is effectively saying the same thing.”
He added that there is a “clear indication that pressure is being felt by [the regulator] to look at increasingly innovative deals” to maintain employers, while allowing the scheme to secure or improve its position. But Kew said the move was “positive for UK plc, positive for those schemes with sponsors important/rich enough for the regulator/PPF to be interested in, and positive for the PPF”.
Martin Clarke, the PPF’s executive director of financial risk, said it welcomed the completion of the deal, adding the KPP trustees have secured “an opportunity to remain outside of the PPF, in both members' and our levy payer interests”.
