RPT-BREAKINGVIEWS-Xerox prints a new twist for debt markets

By Sebastian Pellejero

NEW YORK, March 3 (Reuters Breakingviews) - Xerox XRX.O found another way to turn paper into cash. The storied printer maker pulled off a complex asset reshuffle to support new funding while issuing warrants meant to draw debtholders into a haircut. The aim is to slim down a $4 billion debt load towering over a company with a market value of under $220 million, down from $16 billion in 2014. To do so, it’s gotten a little help from the bulging private credit market. Expect more stragglers to try their hand at similar maneuvers.

Non-bank lending funds may have hit wobbles recently, but that’s after a long hot streak, raising over $640 billion worldwide since 2022, according to S&P Global Market Intelligence. Buyout baron TPG’s credit arm has stepped in here, helping to set up a new vehicle into which Xerox has placed its intellectual and brand property. That move secured a new $405 million loan and $45 million in preferred equity for the company, at the cost of paying a 2% royalty on related revenues to keep using the assets.

It’s a wily gambit born of necessity. The 120-year-old company is levered at over seven times its EBITDA last year. Xerox's dollar bonds due August 2028 recently traded around 55 cents, suggesting deep investor skepticism.

That sense of defeat offers another opportunity, though. Separately, Xerox issued warrants giving shareholders the right to buy stock at $8 through 2028. Payment can be made in cash or, in certain cases, by tendering specified bonds, effectively inviting dispirited debtholders – who just watched key collateral shuffle away – to swap discounted IOUs into equity while the stock sits near $1.69.

The instinct is familiar, even if the mechanics keep evolving. In 2017, clothing retailer J.Crew shifted assets into a separate entity to unlock new financing, presaging a wave of similar moves from the likes of Revlon, Neiman Marcus and Travelport. Xerox's copy is softer – creditors retain some recourse – but an initial bond selloff showed that painful memories remain.

These so-called liability-management exercises now account for roughly two-thirds of defaults, according to PitchBook, up from less than 10% in 2020, as companies use them to sidestep bankruptcy court.

Remarkably, none of this appears to have jammed Xerox’s ambitions. Even after last year's $1.5 billion acquisition of rival Lexmark, management seems intent on further deals. It’s surprising bravado under the circumstances, and private credit seems happy to oblige. In a market this well-funded, even a fading franchise can keep printing time.

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CONTEXT NEWS

Print and digital solutions provider Xerox said on February 17 it had raised $450 million through a joint venture with investors led by TPG. The transaction consists of $405 million of senior secured term loans and $45 million of preferred equity. The company contributed certain intellectual property assets to the JV, including trademarks related to the Xerox brand, and will continue to use them under a long-term licensing arrangement.

Separately, Xerox issued warrants on February 12 to shareholders that give them the right to buy shares at a fixed price through 2028. The warrants can be exercised with cash, or in some cases, by surrendering certain Xerox bonds.