Toner News Mobile › Forums › Latest Industry News › XEROX HAS $9.3B. IN DEBT
- This topic has 0 replies, 1 voice, and was last updated 9 years, 8 months ago by Anonymous.
-
AuthorPosts
-
AnonymousInactivehttp://quicktake.morningstar.com/Stocknet/san.aspx?id=334325
XEROX HAS $9.3B. IN DEBT
New Credit Rating: Xerox
Morningstar is initiating credit coverage of Xerox XRX with a
BBB- rating. Most notably, the firm scores poorly on our Solvency Score
measure, owing primarily to its large receivables financing program. The
decision to provide customers with long-term financing, which has
become a key part of Xerox’s relationship with many, adds a large dose
of leverage to the balance sheet. More than one fourth of assets at the
end of 2009 were tied to customer financing activities, and the firm
finances the vast majority of these assets with debt. Of Xerox’s $9.3
billion in debt at year-end 2009, $6.6 billion was tied to customer
financing. Return on invested capital and interest coverage, two
additional components of the Solvency Score, also suffer as a result of
the large financing operations, as the firm engages in this activity
more to support equipment sales than to generate profit. We believe
Xerox’s receivable book is well diversified and provides a solid asset
base to borrow against. Historically, provisions for loan losses and
actual write-offs have run at less than 1% of total receivables per
quarter. We didn’t adjust our Solvency Score upward, however, as
financing customer purchases does present more balance sheet risk than
leaving this activity to a third party. In addition, any issue with
Xerox’s ability to access the capital markets would probably hurt sales.We
have given the firm credit for the quality of the collateral against
which it borrows in our Cash Flow Cushion calculation. The firm faces
about $1 billion in debt maturities each year for the next decade. In
addition, the firm repaid $1.7 billion of Affiliated Computer Services’
debt after completing its acquisition of the company earlier in 2010.
Most of Xerox’s debt not tied to receivables was issued in 2009 to
prepare for the ACS acquisition, leaving the firm with $3.8 billion in
cash at the end of 2009. Beyond 2010, we expect Xerox will generate
about $1.5 billion in cash per year through our five-year explicit
forecast period. At that level of cash generation, the firm will cover
its obligations only once over during the next five years. However, we
expect Xerox will be able to issue additional debt against new
receivables created in the course of business. As a result, we assume
that the firm refinances 70% of its debt that comes due between 2011 and
2014, roughly the same percentage of its current debt load tied to
customer financing. This cash inflow provides a decent cushion against
an unexpected downturn in the business, moving the Cash Flow Cushion
into a range more typical for a BBB rated company. If the firm is unable
to refinance debt, it would probably begin allow its receivable book to
shrink, also boosting the cash cushion.Xerox’s rating benefits
from a solid Business Risk score, which is the result of the firm’s size
and narrow economic moat rating. We believe Xerox’s competitive
position is on the weak side among firms with a narrow moat rating,
though. Xerox has created an impressive recurring revenue stream around
its large installed base of equipment, but competing on the merits of
hardware is a daunting task, especially given the attitude that office
machines are cost centers to minimize and not strategic differentiators.
When it is time to upgrade, we do not believe there is enough
complexity in the typical office machine to generate significant
switching costs. On the other hand, while we question the strategic
rationale behind the ACS acquisition, we do like the business. ACS
outsources entire business processes that take time and effort to set
up, creating stronger bonds with the clients and thereby making the
supplier more difficult to replace. -
AuthorMay 17, 2010 at 1:23 PM
- You must be logged in to reply to this topic.