Xerox Sells $1.1 Billion of Debt After Yields Reach Record Low

Xerox Corp. (XRX), the provider of printers and business services, sold $1.1 billion of debt in the company’s second offering within a year after investment-grade bond yields fell to a record low this month.

Xerox issued $600 million of 18-month floating-rate notes and $500 million of 2.95 percent, five-year debt that pays 210 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Xerox last sold five-year notes in December 2009, issuing $1 billion of 4.25 percent debt at a 225 basis-point spread over Treasuries, Bloomberg data show.

Xerox is preparing to pay back $1.1 billion of 5.5 percent senior unsecured notes maturing in May, Bloomberg data show. The Norwalk, Connecticut-based company cut interest expenses with today’s offering as average investment-grade yields tumbled to a record low 3.4 percent on March 2, before rising to 3.43 percent yesterday, Bank of America Merrill Lynch index data show.

The company’s investment-grade rating “is very important to us because we’ve got long-term contracts with our customers,” Chief Financial Officer Luca Maestri said at a Feb. 15 conference held by Goldman Sachs Group Inc. “It’s important for us with the way we compete in the marketplace.”

Proceeds may be used to refinance outstanding obligations and for general corporate purposes, Fitch Ratings said in a note today.

The 18-month debt pays 140 basis points more than the three-month London interbank offered rate, Bloomberg data show. Libor (US0003M), a lending benchmark reported by banks, was set at 0.474 percent today.

Underfunded Pension

While low interest rates have benefited the company by reducing borrowing costs, they’ve increased its pension expenses, Maestri said. Even as Xerox took $600 million of debt out of its capital structure last year, its pension was underfunded by about the same amount, keeping its leverage ratio constant, he said.

Xerox’s ratio of debt to operating earnings before interest, taxes, depreciation and amortization was 2.8 times on Dec. 31, down from 3 times a year earlier, Fitch Ratings analysts said in the note, assigning a BBB grade to today’s securities.

Standard & Poor’s has a BBB- grade on the company with a “stable” outlook while Moody’s Investors Service has a Baa2 grade with a “positive” view, Bloomberg data show.

Mostly Short-Term

Most of Xerox’s debt is short-term as it’s used to support its leasing and customer financing business, requiring the company to continually refinance the securities, Morningstar Inc. analyst Michael Hodel wrote in a note today.

Hodel said the company’s “current emphasis on share repurchases” may make today’s notes unattractive. Xerox spent $700 million in share buybacks last year and plans $1 billion for this year, he said.

“Combined with an expected $300 million dividend payout and acquisition spending, the firm’s cash flow in 2012 is largely spoken for,” he wrote.

Before today, the company last sold bonds in May, issuing $300 million of three-year floating-rate notes and $700 million of 4.5 percent, 10-year debt, Bloomberg data show. That offering was its first in 17 months.

Xerox added business-process services to its document- management and printing expertise with its 2010 acquisition of Affiliated Computer Services Inc. The approximately $6 billion purchase, Xerox’s largest, gave it growing markets, including managing and automating electronic payments for governments.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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