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PUBLICATION: Dow Jones (www.dowjones.com)
Date of Issue: 1st February 2012
“I am concerned with the amount of assets that require a level 3 valuation approach that are in the pension portfolio, and what sort of realizable value these assets would generate if they were brought to market and sold today,” said Nick Gibbons, a senior analyst and director at Gradient Analytics Inc [subsidiary of Sabrient Systems], who analyzes companies' pension plans.
Kodak Pensions Stocked With High Level of Illiquid Assets
By Joseph Checkler
If Eastman Kodak Co. is forced to shed some of its U.S. pension assets, it might have a tough time: Nearly a third of them are tied up in volatile, often illiquid private equity and real-estate investments.
Of the $4.9 billion in assets Kodak reported in its U.S. pension plans at the end of 2010, more than 30% were so-called "level 3" assets, typically less liquid investments without an easily definable value. Unlike some companies, Kodak provides a more specific snapshot of the allocation of its pension funds in regulatory filings, and the numbers show a bulk of those assets are tied up in private equity and real estate investments.
"I am concerned with the amount of assets that require a level 3 valuation approach that are in the pension portfolio, and what sort of realizable value these assets would generate if they were brought to market and sold today," said Nick Gibbons, a senior analyst and director at Gradient Analytics Inc. who analyzes companies' pension plans.
It's been clear all along that one of Kodak's big challenges after filing for Chapter 11 bankruptcy protection earlier this month---along with selling its patents---would be cutting costs related to billions of dollars in U.S. pension obligations. But that challenge is more daunting when so much of those underfunded pensions are tied up in hard-to-value private investments, some of which have long lockup periods that prevent their immediate sale. And in the event of any sort of forced liquidation, the volatile nature of those investments could compel sales at prices much lower than Kodak might want.
Kodak spokesman Al Brakoniecki said the company's U.S. and foreign pension plans have independent boards that oversee the assets.
"Kodak does not speculate on what decisions each independent board will, or should make, in regard to investments in each respective plan," Brakoniecki said in an email. It's unclear why Kodak's pension plan has moved so heavily into private equity.
The high percentage of level 3 assets alone---private equity or not---was worrisome enough to Gibbons that he included Kodak in a July 2010 "watch list" of companies with troubling pensions.
"I would say that, on average, companies dedicate about 11% of plan assets to non-equity or non-debt securities," Gibbons said in an interview with Dow Jones. Some companies, such as Ford Motor Co. (F), set targets of nearly a quarter of their pension assets to invest in alternative investments, but rarely more than that, he said.
One of the reasons Kodak made the list, Gibbons said, was due to concern about "what sort of realizable value these assets would generate if they were brought to market and sold today."
Aside from the level 3-induced warning signs, Gibbons was also alarmed by Kodak's rather bullish projections of investment performance, even after the company underperformed its expectations in 2009.
"We believe [Kodak's] pension expense will be far removed from actual economic reality if the company's plan assets continue to underperform the assumed rate of return," Gibbons predicted in 2010.
Pension liabilities aren't the only reason Kodak filed for bankruptcy protection, of course.
The company had long struggled to keep up with the rise of digital technology, and its recent shift toward selling printers didn't lift the company enough to stave off a Chapter 11 filing. Now in bankruptcy, the company is trying to sell its digital patents and cut costs.
Of those costs, pension liabilities are among the biggest, and they're getting even bigger.
At the end of 2010, Kodak's U.S. pension funds were about 96% funded, according to filings. But earlier in January, the Pension Benefit Guaranty Corp., which insures Kodak's two U.S. pension plans, said those plans are now just 86% funded, with about $4.9 billion in assets to cover and about $5.6 billion in benefits.
While Kodak hasn't given an indication that it plans on terminating its pensions, the PBGC would be forced to step in if that ever happened.
"We don't dictate how companies invest," said PBGC spokesman Marc Hopkins when asked if the high concentration of private equity investments was a concern.
What Kodak ends up doing with its pension, which increased its private-equity exposure in 2005 and has kept it high ever since, is a question that is still years away from being answered. The secondary market for private equity has been frothy since 2010. That means Kodak or the PBGC, if forced to take over the company's pensions, could find it tough to get as much as they want if they're forced to sell the assets.
"The concern is, over the long run, what is it that's in these level 3 assets?" Gibbons said.