Reuters Company News
Xerox rtgs cut by Moody's on debt, cash flow worry
NEW YORK, May 1 (Reuters) - Xerox Corp.'s (NYSE:XRX - news) "junk" ratings were cut as many as four notches by Moody's Investors Service on Wednesday over concern about the copier maker's heavy debt load and "modest" sales growth prospects.
"The size of this downgrade is a surprise," said Domenick Fumai, a fixed-income analyst at BNP Paribas, which trades Xerox bonds. "Moody's may be trying to be proactive, but this seems like a bit of an overreaction." Fumai has a "hold" rating on Xerox bonds.
Moody's cut Stamford, Connecticut-based Xerox's senior unsecured debt three notches to "B1," its fourth highest junk grade out of 11, from "Ba1."
It also cut Xerox's subordinated debt four notches to "B3," its sixth highest junk grade, from "Ba2," and its preferred stock four notches to "Caa1," its seventh highest junk grade, from "Ba3." Its rating outlook is negative, and its actions affect $9 billion of debt.
The cut should raise Xerox's borrowing costs, at a time Xerox faces tough competition and a slowdown in corporate spending. Xerox must renegotiate $7 billion of bank loans by October.
Xerox Chief Executive Anne Mulcahy called Moody's downgrade "inconsistent with the company's progress and momentum" in a statement. "We have significantly improved our operations and strengthened our liquidity," she added.
Moody's said while Xerox has "made very good progress in reducing debt through asset sales and lowering its overhead through cost containment initiatives, its ability to generate meaningful cash flow going forward is in good part dependent on revenue growth," whose prospects Moody's deemed "modest."
The company's free cash flow in its main copier business fell by nearly half last year, Moody's said.
Another rating agency, Standard & Poor's, on April 18 threatened to cut Xerox's "BB" corporate credit rating, its second highest junk grade.
Xerox shares closed Wednesday on the New York Stock Exchange at $9.07, up 22 cents. They have fallen 8 percent in the last year. Moody's announced the downgrade after U.S. markets closed.
CREDIT FACILITY
Fumai said Xerox's big concern is its $7 billion credit line, as investors grow more cautious about other big companies with credit concerns such as Qwest Communications International Inc. (NYSE:Q - news) and WorldCom Inc. (NasdaqNM:WCOM - news), two phone companies.
"People are concerned about banks possibly not lending to less-than-stellar credits," said Fumai. "I think the banks will at the end of the day renegotiate the facility, (but) the downgrade is going to hurt Xerox on pricing, and I would expect banks to place particularly restrictive covenants on Xerox."
Xerox said on Wednesday it expects to refinance the credit line by June 30.
Moody's said it expects Xerox to use a "significant portion" of its $4.7 billion of cash to repay the bank loans, and expects a "notable increase" in pricing terms. The company has about $2.4 billion of other obligations maturing this year and $2.9 billion in fiscal 2003, Moody's said.
Xerox last week posted a first quarter net loss of $64 million, or 9 cents per share, on revenue of $3.7 billion.
The unaudited results are subject to change under an agreement with the Securities and Exchange Commission. The SEC had charged Xerox with using accounting tricks to distort financial results from 1997 through 2000. Xerox agreed to pay a $10 million penalty and restate its results, without admitting or denying any wrongdoing.