Kohlberg Kravis Roberts & Co's KKR.UL investment in troubled photography company Eastman Kodak Co may look risky but a 10 percent annual return and protections even if the company fails could make it all worthwhile.

The photography company on Wednesday announced a plan to raise up to $700 million to bolster its balance sheet and free up capital for investments, allaying concerns it could go out of business.

Under the plan, KKR would buy up to $400 million of Kodak's senior secured notes due 2017. The private equity firm will get two board seats and could gain as much as a 17 percent stake in the company, according to a source familiar with the situation.

At about $400 million, the deal could give KKR a prime stake in Kodak, whose market capitalization is about $1.7 billion.

KKR gets the right to buy 40 million to 53 million shares, and will be paid about 10 percent interest on its financing. Should Kodak ever seek bankruptcy protection, KKR would be near the head of the line to recoup the full value of its investment because of the type of debt it is buying.

As long as Kodak's assets in a bankruptcy court are at least $650 million, KKR is totally covered, said Cross Research analyst Shannon Cross. It's a great deal for KKR. They get a good yield on their debt -- at least $40 million a year -- and they will get more stock every year, too.

But the deal does not change negative opinions about operational strength at Kodak, which hopes for strong sales of digital cameras and desktop printers during what could be another gloomy holiday shopping season. [ID:nN17197826] Shares in the company fell 11 percent on Thursday.

Refinancing removes bankruptcy risk, said Deutsche Bank analyst Chris Whitmore, who noted that Kodak faced a payment of $575 million in October 2010.

We continue to believe that Kodak must dramatically change its strategy or face continued (cash) burn and poor profitability, he said.

Kodak's revenue has fallen short of Wall Street expectations for four quarters in a row as consumers spend less on discretionary items like pocket video cameras.

Its growth plans have been hampered by tight credit markets that have kept other companies from investing in its commercial printing systems and services.

According to Reuters Estimates, the four analysts who cover Kodak all rate it at sell. Credit rating agency Standard & Poor's raised its opinion on shares of Kodak on Thursday, but Moody's said its negative outlook was not changed.

We view this deal as positive from a liquidity standpoint but very dilutive for equity shareholders, Cross said. Essentially, what Kodak has done is dilute its shareholders by about 40 percent and increase annual interest expense by $45 million, in exchange for a push out of debt maturities and an additional $125 million in cash.

The stock has more than doubled since its last quarterly report in July, boosted in part by the covering of short positions, analysts said.

(Additional reporting by Megan Davies; Editing by Gary Hill)

Investment