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Rating Action: Moody's assigns Ba1 to Xerox Holdings' proposed notes; outlook negative
Global Credit Research - 03 Aug 2020
New York, August 03, 2020 -- Moody's Investors Service ("Moody's") assigned a Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR), and an SGL-1 speculative grade liquidity rating to Xerox Holdings Corporation (Xerox Holdings), the parent holding company of Xerox Corporation. Moody's also assigned a Ba1 rating to Xerox Holdings' proposed senior unsecured notes. The outlook is negative. As part of the rating actions, the CFR, PDR, and SGL rating of Xerox Corporation were withdrawn. All other ratings for Xerox Corporation were affirmed. The proposed notes will be issued by Xerox Holdings and used to refinance existing notes of Xerox Corporation that mature in the second half of 2020.
Ratings for the proposed notes reflect the guarantee provided by Xerox Corporation resulting in the new senior unsecured notes of Xerox Holdings being pari passu with the existing senior unsecured notes of Xerox Corporation in respect of the assets of Xerox Corporation. Going forward, we expect Xerox Holdings will be the issuer of new debt instruments as debt at Xerox Corporation is refinanced. Ratings also assume that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.
..Issuer: Xerox Holdings Corporation
..Corporate Family Ratings, Assigned Ba1
..Probability of Default, Assigned Ba1-PD
NEW Proposed Gtd Senior Unsecured Notes, Assigned Ba1 (LGD4)
....Speculative Grade Liquidity Rating, Assigned SGL-1
..Issuer: Xerox Corporation
....Senior Unsecured Shelf, Affirmed (P)Ba1
....Senior Unsecured Bank Credit Facility, Affirmed Ba1 (LGD4)
....Senior Unsecured Commercial Paper, Affirmed NP
....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)
..Issuer: Xerox Corporation
.... Corporate Family Rating, Withdrawn , previously rated Ba1
.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD
.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1
..Issuer: Xerox Holdings Corporation
..Outlook, Negative ..Issuer: Xerox Corporation ....Outlook, Remains Negative RATINGS RATIONALE
Ratings for Xerox Holdings reflect continued uncertainty about the company's ability to stabilize and grow its revenue base over the next few years given the secular decline in copier and printing demand as well as intense global competition. Beyond the impact of COVID-19 and the global recession, Moody's expects Xerox Holdings will be challenged to stabilize revenues in the absence of an unlikely fundamental change in the company's revenue mix or market share. Xerox Holdings' top line faces continuing erosion due to a secular decline in copier and printing demand in developed countries combined with new equipment and service offerings from competing providers, a few of whom have deeper financial pockets, more stable revenues, or exposure in higher growth Asian markets.
Through the first half of 2020, revenues for Xerox Holdings have declined in the mid 20% range due to the impact of COVID-19 and the global recession. "We expect revenue and EBITDA to continue declining for the remainder of 2020 followed by a return to growth in 2021; however, the company has been able to generate free cash flow and has maintained significant liquidity which supports Xerox Holdings' ability to recover when the global recession abates and demand for IT equipment, supplies and services strengthens," said Carl Salas, Moody's senior credit officer.
Xerox Holdings' Ba1 CFR is supported by the company's good market position in its core mid-range print and document outsourcing markets as well as robust liquidity and positive adjusted free cash flow metrics. Excluding the impact of COVID-19, more than 75% of Xerox Holdings' revenue is typically derived from post-sale activities that include document outsourcing, managed print services, maintenance service, supplies (toner and paper), and finance income. These elements come with higher operating margins and provide some revenue predictability. Moody's recognizes the importance of providing customer financing as part of Xerox Holdings' overall selling proposition as it provides a competitive advantage and greater flexibility in structuring large technology purchases; however, financing equipment receivables weigh on the company's risk assessment due to the ongoing need to manage sizable debt maturities and cost of funding.
Ratings for the senior unsecured notes and credit facility (Ba1, LGD4) incorporate the overall probability of default of the company, as reflected in the PDR of Ba1-PD and Moody's expectation for an average family recovery in a default scenario. The assigned SGL-1 rating reflects the company's very good liquidity, supported by $2.3 billion of cash as of June 30, 2020, positive free cash flow despite the impact of COVID-19, and an undrawn $1.8 billion revolving credit facility.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, due to the substantial implications for public health and safety. Given Xerox Holdings' exposure to the global economy, the company remains vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Demand for office copiers and printers is experiencing a secular decline reflecting substitution of traditional physical copies with digital documents and the social trend to go paperless. Governance is also a key consideration given the company's aggressive financial policies. Earlier this year, Xerox Holdings' proposal to acquire HP Inc. was aggressive from an operating and financial perspective. In addition, the company established a new holding company, Xerox Holdings Corporation, with the intent of providing strategic, operational, and financial flexibility. Xerox Holdings guarantees the credit facility of Xerox Corporation but does not guarantee the senior notes of Xerox Corporation which could favor shareholders, holders of Xerox Holdings' new notes, and revolver lenders at the expense of Xerox Corporation noteholders. Xerox Holdings' board is comprised of seven members of which six are considered independent. Xerox Holdings' shareholder base is diversified with funds of Icahn Associates and Vanguard holding 10% to 11% of outstanding shares and other investment firms owning 7.5% or less.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects the persistent pressures on Xerox Holdings' core copier and printing business as well as execution challenges, especially if management's operating and strategic plans include sizable restructuring charges, incremental investments, or relaxation of historical capital allocation policy. The outlook could be changed to stable if the company demonstrates progress in restoring revenues to approach pre-pandemic levels while also restoring operating margins and free cash flow generation.
Xerox Holdings' ratings could be upgraded with business execution that leads to consistent revenue growth, stable to improving operating margins, and growing free cash flow. An upgrade would also require conservative financial discipline, ensuring classes of unsecured debt at Xerox Corporation and Xerox Holdings have similar instrument ratings despite potentially asymmetric investment activities, and maintaining the asset quality of its finance operations while reducing the refinancing risk associated with finance liabilities. These results would be evidenced by achieving and maintaining adjusted operating margins in the low double-digit percentage range, adjusted total debt to EBITDA approaching 1.75x, and improving free cash flow generation.
Ratings could be downgraded if Xerox Holdings is unable to restore and stabilize revenues approaching pre-pandemic levels, or operating margins or other credit metrics weaken after mid-2021. Downward rating action could also occur if liquidity deteriorates including cash balances falling below $1 billion or revolver availability falling below $1.2 billion, adjusted debt to EBITDA exceeds 2.75x after mid-2021, or adjusted free cash flow to debt falls below 15% after mid-2021. Ratings could also be downgraded if the company incurs leverage to undertake any combination of share buybacks, dividends or acquisitions that leads to weakened credit metrics or if classes of unsecured debt at Xerox Corporation or Xerox Holdings have different instrument ratings reflecting asymmetric credit metrics.
The principal methodology used in these ratings was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Xerox Holdings Corporation, with operations in roughly 160 countries, is a worldwide leader in document processing systems and related supplies.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Carl Salas VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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