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AnonymousInactiveXerox Sells $1.1 Billion of Debt After Yields Reach Record Low
Xerox Corp. (XRX), the provider of printers and business services, sold $1.1 billion of debt in the company’s second offering within a year after investment-grade bond yields fell to a record low this month.
Xerox issued $600 million of 18-month floating-rate notes and $500 million of 2.95 percent, five-year debt that pays 210 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Xerox last sold five-year notes in December 2009, issuing $1 billion of 4.25 percent debt at a 225 basis-point spread over Treasuries, Bloomberg data show.
Xerox is preparing to pay back $1.1 billion of 5.5 percent senior unsecured notes maturing in May, Bloomberg data show. The Norwalk, Connecticut-based company cut interest expenses with today’s offering as average investment-grade yields tumbled to a record low 3.4 percent on March 2, before rising to 3.43 percent yesterday, Bank of America Merrill Lynch index data show.
The company’s investment-grade rating “is very important to us because we’ve got long-term contracts with our customers,” Chief Financial Officer Luca Maestri said at a Feb. 15 conference held by Goldman Sachs Group Inc. “It’s important for us with the way we compete in the marketplace.”
Proceeds may be used to refinance outstanding obligations and for general corporate purposes, Fitch Ratings said in a note today.
The 18-month debt pays 140 basis points more than the three-month London interbank offered rate, Bloomberg data show. Libor (US0003M), a lending benchmark reported by banks, was set at 0.474 percent today.
http://www.reuters.com/article/2012/03/08/idUSWNA195620120308
Fitch rates Xerox note offering ‘BBB’
March 2012 – Fitch Ratings has assigned a ‘BBB’ rating to Xerox Corp.’s
(Xerox) proposed offering of senior unsecured notes. Net proceeds from
the offering will be used to refinance existing debt and for general corporate
purposes.
The Rating Outlook is Stable.
Approximately $10.8 billion of debt is affected by Fitch’s action, including
Xerox’s undrawn $2 billion credit facility.
Xerox’s ratings and Stable Outlook continue to reflect:
–Services growth led by business process outsourcing, as well as color growth,
should more than offset revenue declines related to black-and-white (B&W) print,
particularly in high-end production printing.
–Substantial recurring revenue from long-term services contracts, rentals and
financing, and supplies (83% of total revenue).
–Solid liquidity supported by $902 million of cash at Dec. 31, 2011, $1.9
billion of availability, net of outstanding commercial paper, under a $2 billion
revolving credit facility (RCF), staggered debt maturities and consistent free
cash flow (FCF). Fitch believes FCF (post-dividends) will continue to exceed $1
billion annually through 2013, despite increased cash pension contributions.
–A highly diverse revenue mix and reduced exposure to the slow-growth print
industry as a result of the acquisition of Affiliated Computer Services, LLC
(ACS).
–The company’s continued investments in research and development support a
broad and strong product portfolio, particularly in color and high-end
production printing.
–Management’s conservative financial policies and strong commitment to
maintaining an investment grade rating.
Fitch’s credit concerns continue to center on:
–B&W revenue pressures primarily due to declining installs, machines in field
(MIF) and associated post-sale revenue from high-end production digital presses
used in transaction printing.
–The aggregate $1.5 billion underfunding of worldwide defined benefit (DB)
pension plans on a projected benefit obligation basis as of year-end 2011, up
from $1.1 billion in the prior year. The lower funded status primarily reflects
a 50 basis point decline in the discount rate to 4.7%. Total contributions are
expected to be $560 million in 2012. In 2011, Xerox contributed $556 million to
its DB plans, consisting of $426 million of cash and $130 million of Xerox
stock.
–New managed print services with existing Xerox clients could cannibalize
equipment and post-sale revenue by reducing printing costs by up to 30%,
potentially offset by cross-selling opportunities for other Xerox products and
services.
–The print industry is intensely competitive, resulting in consistent equipment
pricing pressure, particularly office products.
As of Dec. 31, 2011, Xerox’s solid liquidity was supported by $902 million of
cash, an undrawn $2 billion RCF maturing December 2016 and consistent FCF.
Financial covenants in the RCF agreement consist of minimum total interest
coverage of 3 times (x) and maximum total leverage of 3.75x.
In the latest 12 months (LTM) ended Dec. 31, 2011, Fitch estimates FCF
(post-dividends) was $1.2 billion compared with nearly $2 billion in the
year-ago period due to pension contributions and start-up costs on services
contracts. In the past eight years, annual FCF consistently exceeded $1 billion,
except for 2008 when the company paid a $615 million securities litigation
settlement, resulting in $450 million of FCF.
Total debt with equity credit was $8.8 billion on Dec. 31, 2011, primarily
consisting of approximately $8.4 billion of senior unsecured debt and $349
million of convertible preferred stock, which Fitch assigns 50% equity credit.
As of Dec. 31, 2011, $6 billion, or 68%, of total debt supported Xerox’s
financing business based on a debt to equity ratio of 7:1 for the financing
assets. Xerox’s net financing assets, consisting of receivables and equipment on
operating leases, totaled $6.9 billion compared with $7.2 billion in the prior
year.
Fitch estimates term debt maturities in 2012-2016 and thereafter, adjusted for
the February 2012 debt exchange, are $1.1 billion, $425 million, $1.1 billion,
$1.3 billion, $951 million and $3.6 billion, respectively. Proceeds from the
debt offering will satisfy the vast majority of Xerox’s refinancing requirements
in 2012 followed by very manageable maturities of $425 million in 2013. Fitch
believes future material debt reduction is unlikely due to the financing
business and expected maintenance of $2.5 billion – $3 billion of core debt in
the capital structure.
Fitch estimates total leverage (total debt/operating EBITDA) and core
(non-financing) leverage were 2.8x and 1x at Dec. 31, 2011, respectively,
compared with 3x and 1x in the year ago period. Total interest coverage (total
operating EBITDA/interest expense) and core (non-financing) interest coverage
was 6.6x and 11.1x at Dec. 31, 2011, respectively, compared with 5x and 7.4x in
the year ago period.
Fitch projects core leverage will remain near 1x and core interest coverage will
be low double digits through 2013. Sizable acquisitions could result in a
temporary spike in leverage, but Fitch anticipates the company would
subsequently reallocate FCF toward debt reduction to restore its credit profile,
similar to the ACS acquisition. However, Fitch expects the vast majority of
acquisitions should be $25 million – $50 million and funded with FCF.
Fitch currently rates Xerox and its wholly owned subsidiary, ACS as follows:
Xerox
–Long-term Issuer Default Rating (IDR) ‘BBB’;
–Short-term IDR at ‘F2’;
–Revolving credit facility (RCF) ‘BBB’;
–Senior unsecured debt ‘BBB’;
–Commercial paper (CP) ‘F2’.
ACS
–IDR ‘BBB’;
–Senior notes ‘BBB’. -
AuthorMarch 13, 2012 at 9:17 AM
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