Credit analyst: It's premature to say Xerox has turned the corner

By Ronda Fears

Nashville, Tenn., Jan. 29 - While the market received a rare piece of good news from Xerox Corp. (Ba1/BB) when the company reported fourth quarter earnings, excluding restructuring charges and unhedged currency effects, of 15 cents per share - well in excess of consensus estimates - Carol Levenson, director of research with Gimme Credit, said it's too early to say the company has turned the corner.

"The market loves a turnaround story, and the stock rose nearly 14% on the day. Since it appears management is expecting Xerox to return to losing money this quarter, it might be a tad premature to declare this company turned around," Levenson said in a report Tuesday. "On the issue bondholders remain most concerned about, the renegotiation of the company's $7 billion revolver maturing in October, there was no news, good, bad, or otherwise. Are we the only ones wondering why the bank negotiations are taking so long?"

Xerox first said it was in discussions with its banks about refinancing this loan three months ago, the analyst noted. In the interim, the company placed $1 billion in redeemable convertible trust preferred in November, netting $750 million after fees and escrowed future interest payments, and this month raised another $750 million in senior notes.

"The cost of both private placements was high, but the message that the company could access the capital markets was loud and clear," Levenson said, also noting that the transactions surely demonstrated to Xerox's bankers that the company is not entirely desperate for funds. In addition, she pointed out that GE Capital loaned the company $1.5 billion in fourth quarter, secured by lease receivables.

"You make the call as to whether the redeemable preferred (putable as well) should be viewed as debt or equity (we say debt). But apparently under the terms of the company's bank agreement it adds to the company 's tangible net worth, causing its cushion under this loan covenant to increase from a scarily slender $200 million in the third quarter to $1.3 billion at the end of the year," Levenson said.

"Perhaps the banks are waiting for Xerox to get a clean bill of health on its accounting issues, since there's no hurry on their part to renegotiate."

The company has frustratingly stopped reporting its finance operations separately in terms of debt, interest, or income, Levenson said, but she added its overall net debt declined in the fourth quarter by $1.4 billion by the company's calculation, or $400 million by Levenson's. Either way you look at it, she said, the rate of debt reduction is slowing now that the major asset sales are out of the way.

Perhaps the best news of all was an increase in adjusted EBITDA of $400 million over the prior year, the analyst said, with most of the improvement coming from higher earnings and lower interest expense. But, she added, operating cash flow after capital spending was down by $300 million, despite a 50% drop in capital spending, largely due to a huge decrease in working capital and other changes.

"Since most working capital items showed an improvement over the prior year, 'other changes' must have really used up substantial cash. We await a full cash flow statement to solve this particular mystery," Levenson said.

"At any rate, don't look to free cash flow to provide substantial funds for further debt reduction. Another curious note: At the end of the third quarter, the company's 2002 maturities were reported to be $9 billion. Now they're reported to be $9.7 billion. Either something got accelerated in the quarter (perhaps with the S&P downgrade) or some of the GE loan is really short-term. We see further downside here."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.