Xerox strengthens on new financing; light volume in strong toned market

By Sara Rosenberg

New York, Oct. 21 - In a day that saw light volume and a positive tone in convertibles, Xerox Corp.'s 7.5% preferred convertibles gained a couple of points following news of a $5 billion financing deal with General Electric Co.

"The market had a positive tone across the board," a trader told Prospect News. But there was "light volume. We've got to see how these earnings reports turn out," he added.

"Spreads have been tightening. That helps. Things seem to be better from the credit side but there hasn't been improvement in valuation," according to a convertibles analyst. While things are moving in the right direction with the stock market improving, Treasuries have not performed well, offsetting some of the positives in this initial stage of an improved market environment, he explained.

"The market so far this morning has been pretty strong," said Stuart Novick, convertibles analyst at Salomon Smith Barney, earlier in the day, with most of the morning activity coming from buyers. "Oil services though are not up today. It seems to be down fractionally across the board but that's generally speaking."

As for the prospects for new issuance, if there is a "sustained rally" then the "picture could change dramatically" resulting in some new deals, the analyst quoted above said. However, at this point, there is no expectation for an increase in activity.

Xerox was "pretty active" on Monday following the announcement of a financing agreement with General Electric, according to Novick.

Under the agreement, GE will provide Xerox with up to $5 billion in funding for a period of eight years, secured by customer lease receivables. Furthermore, GE Vendor Financial Services will become the primary equipment financing provider for Xerox customers in the U.S. through monthly advances against Xerox's new U.S. lease originations.

The financing agreement is effective immediately and calls for GE to lend against Xerox's U.S. lease receivables at over-collateralization rates that are currently about 10%.

"We are pleased that our relationship with Xerox continues to grow and strengthen," said Dan Henson, president and chief executive officer, GE Vendor Financial Services, in a news release. "Our two organizations working together provide an effective combination with a great value proposition."

"This significant agreement represents a major step forward in Xerox's well defined strategy to further fortify its financial position," said Lawrence A. Zimmerman, Xerox senior vice president and chief financial officer, in the release. "We have put the right processes in place, supported by this long-term contractual arrangement with GE, to ensure financial flexibility as we effectively manage and strengthen our balance sheet."

The $5 billion is in addition to the already funded $2.5 billion from GE, which is also secured by lease receivables.

"Xerox's straight paper has moved up," Novick said. And, the convertibles were no different. At approximately mid-day the 7.5% preferred exchangeables were trading at 47 versus the $6.75 stock price, according to Novick. On Friday, the convertibles closed at around 42¾ versus $5.94 on the common stock. These exchangebles are putable in December 2004 and have a yield to put of 10.75%.

The preferreds closed the day around 10½ to 11 points over parity, or approximately 48¾ to 49¼ versus the stock close of $6.98, according to a trader.

The Stamford, Conn. document company is scheduled to release third quarter earnings on Wednesday. Earnings estimates by analysts for the quarter are 2c per share, according to the company's investor relations website.

Overall, there was "not a whole lot of anything," Novick said. "We've traded some things here and there but I don't see any overriding themes today." Some names that experienced small trades on Monday included Data Translation Inc., Omnicom Group Inc., Interpublic Group of Cos. Inc., Lamar Advertising Co., American International Group Inc., Horace Mann and Franklin International.

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