The Pensions Regulator’s new collaborative stance should pave the way for more debt for equity deals

Kodak’s UK pension plan risked becoming the latest to enter the Pension Protection Fund (PPF) after its parent company Eastman Kodak entered Chapter 11 insolvency in the US.

This outcome would have been inevitable if the trustees and their advisers had not reached a groundbreaking settlement with their former sponsor, which allowed them to create a new scheme to protect member benefits.

Kodak

In one move the trustees managed to improve their members’ outcomes and relieve the defunct company of the $2.8bn claim for support which was triggered by the start of the Chapter 11 proceedings.

The settlement is being lauded as a great success, but it was born out of a disappointment

The settlement is being lauded as a great success, but it was born out of a disappointment. Initially Eastman Kodak was hoping to sell 10% of its intellectual property to raise funds to pay off their creditors and emerge from the Chapter 11 process.

However, the sale did not raise enough money so the firm reluctantly decided to sell its personalised imaging and document imaging businesses.

The trustees identified that they might value the businesses more than other buyers

Again, the bids fell short of Eastman Kodak’s expectations, so the trustees had it valued and agreed that the bids were much lower than the companies were worth. “The trustees identified that they might value the businesses more than other buyers because what the trustees needed most was a steady cashflow,” says Katie Banks, the partner at Hogan Lovells who led on the case, adding that “other people seemed to be wanting to take advantage of a fire sale mentality”.

The trustees needed to set up a new scheme which would offer higher benefits than the PPF

So it looked like a win-win, but that was not the end of the story. The trustees needed to set up a new scheme which would offer higher benefits than the PPF could deliver, but lower than the original plan. Kodak Pension Plan had traditionally provided very generous pensions, but was running at a significant deficit so the trustees could not be confident of their ability to pay at that level.

Trustees consulted with members to ask if they were willing to accept lower benefits and transfer to the new plan or remain in the old scheme and enter the PPF

They could not put the members into a different scheme without their permission, so the trustees consulted with them to ask if they were willing to accept lower benefits and transfer to the new plan or remain in the old scheme and enter the PPF.

“The members get better benefits than they would have got from the PPF, and also the PPF benefits because our levy payers are not having to pick up the (whole) tab,” said Richard Williams, head of corporate affairs at the PPF.

Debt for equity swaps will happen again, because I think that it helps both parties

Other schemes with struggling sponsors may look to pursue similar approaches in the future. “Debt for equity swaps will happen again, because I think that it helps both parties – the company that’s in trouble and the pension scheme,” said Banks.  “People will be looking for innovative solutions to stay out of the Pension Protection Fund and save jobs”.

We’re prepared to be creative and work collaboratively with pension trustees and employers

This is a reality which The Pensions Regulator has accepted. “Where businesses are in a distressed state, we’re prepared to be creative and work collaboratively with pension trustees and employers to explore the options in order to find viable outcomes,” said Stephen Soper, the Regulator’s chief executive.