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Fitch Gives Unfavorable Rating on Eastman Kodak debt and bonds

Press release from the issuing company

NEW YORK--Oct. 7, 2003-- Fitch has rated both Eastman Kodak Company's pending 10-year senior bonds and 30-year convertible senior bonds 'BBB-'. Fitch rates Kodak's existing senior unsecured debt 'BBB-', and its commercial paper program 'F3'. The Rating Outlook is Negative. Approximately $3 billion of debt is affected. On Oct. 6, 2003, Kodak announced its intention to commence a $1 billion debt offering, composed of $500 million of senior notes under its existing shelf registration, and $500 million of convertible senior notes. The convertible senior notes are expected to have a term of 30 years (with a right by Kodak to call them on or after seven years, and a right by holders to put their notes at various times on or after seven years) and will be convertible into Kodak common stock at a price to be determined by negotiations between Kodak and the initial purchasers of the notes. The terms of the convertible notes offering are expected to include an option exercisable by the initial purchasers to purchase up to an additional $75 million in aggregate principal amount of the notes. The convertible notes will be senior unsecured obligations of Kodak. Net proceeds of the proposed $1 billion offering are to be used to repay a portion of Kodak's commercial paper borrowings and to partially fund the company's previously announced acquisition of PracticeWorks, Inc. The ratings reflect Kodak's leading market position in the U.S. consumer film market, strong shares in international markets, a sharp dividend cut and the expectation that internally generated funds will allow the company flexibility to implement a new strategic direction. The ratings also consider Kodak's continued weak operating performance in core photographic businesses due to increased pricing pressure from competitors, accelerated digital substitution, limited gains from cost reduction efforts, and unfavorable economic factors. Kodak has been investing in new businesses to develop growth areas, primarily in the area of digital technologies, and on Sept. 25, 2003, Kodak announced a new digitally oriented strategy to accelerate that growth. The plan calls for the use of cash flow from existing operations, primarily from consumer film, combined with savings from a 72% dividend cut to finance a $3 billion investment and acquisition program. An intermediate term goal is to achieve $16 billion in revenue by 2006. To date Kodak has announced approximately $700 million of acquisitions this year in its Health Imaging and Digital and Film Imaging business units. Future acquisitions are primarily to be made in Health Imaging and Commercial Printing. Kodak also announced that it would no longer make significant investments in its traditional silver halide business, but would instead manage that business to maximize cash flow generation and maintain market share. Further cost reduction steps and significantly reduced dividends should provide Kodak sufficient funds to move forward on its investment plans in the near term without impacting credit measures. However photographic operations continue to be negatively affected by digital substitution and the pace is accelerating. The Negative Rating Outlook reflects this decline as well as the uncertainty that exists regarding the contemplated acquisitions and the direction Kodak is taking, particularly when weighed against existing competition. Furthermore, Kodak's ability to efficiently execute the plan and integrate these new businesses remains a concern. Currently Fitch does not expect debt to be meaningfully reduced in the near to intermediate term. Thus cash flow generation from new investments and acquisitions will be critical to maintaining Kodak's credit profile.