Xerox's Debt Is Downgraded, Renewing Pressure to Sell Assets

Xerox Corp. faced intensified pressure to quickly sell assets after a rating agency downgraded its debt to junk-bond status, a trigger that could force the once-mighty copier giant to come up with $425 million in cash to honor various financial contracts.

Shares of Xerox fell 20%, cutting more than $800 million from the company's market value. At 4 p.m. in New York Stock Exchange composite trading Monday, the shares were down $1.25, in heavy volume, to $5, nowhere near the 52-week high of $29.75 a share.

"Asset sales must be made quickly -- period," said Benjamin Reitzes, an analyst with UBS Warburg. The assets on the block include half of Xerox's 50% stake in Fuji Xerox, a joint venture with Japan's Fuji Photo Film Co.; several business units; and its business-equipment financing operations.

Analysts said Xerox, Stamford, Conn., could face a cash crunch because the company has, since October, been unable to tap the commercial-paper markets for its short-term borrowing. Instead, the company has had to tap a $7 billion line of credit from a consortium of banks.

As of Oct. 31, the company had drawn down $5.3 billion of that line and said it expected to need an additional $1.1 billion to refinance its commercial paper for the rest of the year.

If Xerox doesn't generate positive cash from operations in the fourth quarter -- or make significant asset sales -- the company would then be close to using up its entire $7 billion line of credit. Xerox spokesman Jeff Simek said the company would have to use up the entire credit line only in a "worst-case scenario."

Late Friday, Moody's Investors Service downgraded $11 billion of Xerox's total $17.1 billion of debt to Ba-1 from Baa-2. Standard & Poor's, the other big rating agency, still rates Xerox debt at the lowest level of investment grade. The Moody's downgrade gives unknown counterparties the right to compel Xerox to repurchase as much as $110 million in derivatives agreements. The downgrade also means the company could be unable to sell $315 million in accounts receivables, as planned, and would have to come up with the money from other sources, according to the company's Securities and Exchange Commission filings. Although those outcomes aren't automatic, Mr. Simek says it is "likely" that the company will be asked to repurchase the contracts and come up with at least some of the money from other sources.

But he said Xerox had successfully negotiated more-favorable terms with counterparties to some of the derivative agreements. He said the company still had "adequate liquidity."

If Standard & Poor's downgrades Xerox debt to junk-bond status, the company would likely have to repurchase an additional $130 million. Martha Toll-Reed, an analyst with Standard & Poor's who follows Xerox, said the firm had no plans to downgrade Xerox debt "in the absence of material negative news" and still expected the company's business to turn around.

Rebecca Runkle, an analyst with Morgan Stanley Dean Witter, said the Moody's downgrade "tightens the financial screws even tighter" on Xerox. But Ms. Runkle noted that Xerox is still in compliance with the covenants of its bank line of credit and still has the flexibility to borrow more from other sources.

Mr. Simek said Xerox was still "on track" to make asset sales. In October, the company said it expected to receive the proceeds from the first asset sales within the "next several months," but Mr. Simek said Monday that Xerox couldn't now be more specific. He said the company was taking pains to get "a fair price for our assets." He added, "It's not ordinarily the kind of thing you would do overnight."