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Xerox Holdings Corp. Downgraded to (BB-) Amid Rising Leverage
and Weaker Free Cash Flow Projections; Negative Outlook Maintained.
Xerox Holdings Corp., the prominent U.S.-based provider of printer technology and services, has been downgraded to a ‘BB-‘ credit rating from ‘BB’ following concerns over increased leverage and deteriorating free cash flow expectations. This rating adjustment reflects the company’s recent financial performance and outlook for the coming year.Our revised projections now anticipate Xerox will generate near-break-even core free operating cash flow (FOCF) in 2024, excluding the impact of its strategic run-off of finance receivables. This is a significant decrease from our earlier forecast of approximately $200 million. The downgrade is attributed to weaker-than-expected operating results during the first half of the year, which have impacted overall financial stability.
S&P Global Ratings now foresees that Xerox’s adjusted leverage will climb to the low-3x range by 2024. This shift is driven by a projected revenue decline of up to 6%, coupled with increased freight and product costs that are overshadowing the benefits from cost-saving initiatives related to the company’s ongoing transformation program. As a result, only marginal improvements in EBITDA margins are expected. Previously, leverage was anticipated to remain in the mid-2x range by year-end.
In response to these developments, we have lowered Xerox’s issuer credit rating to ‘BB-‘ from ‘BB’. Additionally, the ratings on its senior secured term loan have been adjusted to ‘BB+’ from ‘BBB-‘, and the ratings on its senior unsecured notes have been downgraded to ‘BB-‘ from ‘BB’.
The negative outlook underscores the considerable execution risks associated with Xerox’s Reinvention transformation program. These risks are particularly pronounced given the company’s efforts to navigate a shifting operating model and significant product investments, all while contending with the ongoing challenges in the core print industry.
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