Fitch Rates Xerox's Proposed Notes 'BBB'; Outlook Negative

NEW YORK -- (BUSINESS WIRE) -- Fitch Ratings has assigned a 'BBB' rating to Xerox Corp.'s (Xerox) proposed offering of senior unsecured five-, 10- and 30-year notes. Fitch continues to rate Xerox as follows:

--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured revolving credit facility (RCF) at 'BBB';
--Senior unsecured debt at 'BBB';
--Trust preferred securities at 'BBB-'.

The Rating Outlook is Negative.

The net proceeds from the note offering will fund a portion of the cash consideration for Xerox's proposed acquisition of Affiliated Computer Services, Inc. (ACS) as well as to repay a portion of ACS' senior credit facility due upon completion of the merger. In September 2009, Xerox announced the acquisition of ACS for total consideration of $8.4 billion, including $2.3 billion in assumed debt ($7.8 billion less cash acquired). The cash portion of the acquisition, including transaction fees, is expected to total $2 billion. Additionally, Xerox will repay the $1.8 billion outstanding under ACS' secured credit facility upon closing the acquisition, as the transaction will trigger the change of control provision in the credit agreement. Fitch expects that $3.8 billion total funding necessary will come from a combination of term debt issuance, Xerox's cash on hand and drawings under its $2 billion RCF.

Current ratings incorporate Fitch's expectation that post transaction close, Xerox will utilize the majority of its free cash flow to repay debt with no share repurchases and only modest acquisition activity. Lack of debt reduction or a more aggressive financial policy would likely result in negative rating actions.

Fitch believes the acquisition will increase the stability of Xerox's revenue base by reducing the mix of equipment sales and increasing the percentage of higher-margin recurring services revenue, both of which will augment the stability and consistency of Xerox's free cash flow profile. ACS generates approximately $500 million of annual free cash flow and Fitch believes the annual free cash flow of the combined company will be at least $1.2 billion. Realization of cost or revenue synergies from the transaction could drive upside to this estimate.

The Negative Outlook reflects:

-- A moderate risk of business disruption as Xerox seeks to maximize the long-term cost savings from the transaction. Additionally, ACS is the largest acquisition in Xerox's history and will occupy a portion of management's time and attention. Nonetheless, Fitch believes integration risk is lower than it would normally be for a transaction of this magnitude, given minimal business overlap and that ACS will continue to be a stand-alone company under the existing management team.

-- Fitch's concern that the ongoing negative impacts of the weak macroeconomic environment on Xerox's operating results and the bad debt expenses associated with its customer receivables portfolio will indicate that the company is more susceptible to economic factors than previously anticipated. The completion of the ACS acquisition will partially alleviate this concern, given the stability of ACS' services revenue, which Fitch believes will reduce the company's sensitivity to the economic environment.

Total debt adjusted for equity credit was $7.6 billion on Sept. 30, 2009, consisting of approximately $7.4 billion of senior unsecured debt, $649 million of liabilities to a subsidiary trust issuing preferred securities (mandatorily redeemable in 2027), to which Fitch assigns 75% equity credit, and approximately $9 million of debt secured by finance receivables. Fitch estimates debt maturities of $150 million of unsecured notes due in December 2009 and approximately $1 billion due in 2010, consisting of $700 million of notes due in June and $257 million of putable notes due 2023, which Fitch believes will be put to the company in the third quarter of 2010. Xerox's net finance receivables and equipment on operating leases totaled $7.6 billion on Sept. 30, 2009 compared with $8.1 billion on Sept. 30, 2008 due to lower equipment sales and the impact of currency.

Xerox's liquidity on Sept. 30, 2009 was solid and consisted of approximately $1.2 billion of cash and a fully available $2 billion RCF, of which $400 million expires in April 2012 and $1.6 billion expires in April 2013. Liquidity is further strengthened by the company's consistent free cash flow, which totaled $646 million in the latest 12 months ended Sept. 30, 2009 (including the impact of a $615 million litigation payment in 4Q08). Xerox also has access to a secured $5 billion U.S. credit facility provided by General Electric (GE) Vendor Financial Services that expires in December 2010. This facility is available for secured loans backed by Xerox's qualifying U.S. finance receivables, and there was approximately $1 billion available under this facility, based on eligible receivables on Sept. 30, 2009. Xerox has not accessed this facility since 2005 and has repaid nearly all of the outstanding secured debt balances. Fitch does not expect Xerox to access this facility going forward given alternative liquidity sources available to maintain a leverage ratio (debt-to-equity) of 7:1 against finance assets via unsecured debt.

In addition to Xerox, Fitch rates Xerox Credit Corp. as follows:

-- IDR at 'BBB';
-- Senior unsecured debt at 'BBB'.

Additional information is available at www.fitchratings.com.

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