Worthless Stock Inefficiency: Eastman Kodak ($EKDKQ)

Today, Eastman Kodak emerged from bankruptcy. The confirmed plan wiped out the existing common stock, which was cancelled.

"On September 3, 2013, the Plan became effective pursuant to its terms and the Debtors emerged from their chapter 11 cases.

Upon the effectiveness of the Plan, all previously issued and outstanding shares of the Company's common stock were cancelled as were all other previously issued and outstanding Equity Interests."

What is amazing is that everyone knew that the plan had been confirmed and that the shares were going to be cancelled. Yes, the company market cap was $35 million earlier in the month and was $16 million earlier today. Even in the final seconds before the stock was extinguished, the market cap was $8 million.

Note that there was no options related reason to be buying the shares. Here is how the OCC adjusted the Kodak options contracts:

Effective September 4, 2013, existing EKDKQ options will be adjusted to no longer call for the delivery of Eastman Kodak Company Common Shares upon exercise.

In settlement of EKDKQ exercise/assignment activity, an EKDKQ put exerciser (or call assignee) will receive a cash payment of the full aggregate strike price amount on the exercise settlement date. An EKDKQ put assignee (or call exerciser) will pay this amount on the exercise settlement date. Settlement will take place through OCC’s cash settlement system on the third business day after exercise.

Full strike!

It is analogous to Suntech, which is defaulted and has announced that shareholders will be "severely diluted" if they can even make a restructuring plan work. 

Something similar happened with GMX Resources as well. When the company borrowed money at 15% with 20% of the equity thrown in to the lender, the stock doubled.

Kodak's First Day Affidavit Mentions Silver Prices

Even though Kodak had projected [Film, Photofinishing and Entertainment Group] (“FPEG”)to generate less cash as film was replaced by digital imaging, the FPEG business was still anticipated to generate substantial cash flow. The rate of the decline of the market for film between 2008 and 2010, however, was significantly steeper than anticipated by nearly all observers: the industry projected a 10% decline, Kodak forecasted a 20% decline and the actual decline was approximately 40%.

In addition to demand impairment, increasing commodity prices negatively impacted FPEG’s cash flow. FPEG purchased approximately $300 million of silver in 2011. Silver prices have ranged between 199% and 294% higher than 2008 prices. Because of the lingering effects of the economic crisis, Kodak cannot pass through all of these price increases to its customers.

The first day affidavit [pdf], which the Bankruptcy Litigation blog did a post about.

It was about a year ago that I mentioned rising silver prices were causing industrial users to substitute other, cheaper, and less price-volatile materials.