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Xerox Debt Worries Put Banks on Firing Line

Chase and Citigroup may have exposure to the copier giant's increasingly distressed debt.

Monday's selloff in


(XRX) - Get Free Report

could spell trouble for banks that tossed the struggling copier maker a line of credit before its recent woes.

Xerox dropped 20% Monday following a Friday debt downgrade from


, as investors worried about its ability to shoulder a massive $11 billion debt burden. Several analysts say they expect Xerox's funding crunch to worsen in coming months as obligations come due, though the company says it is meeting its cash needs and expects to return to stability and profitable growth. (

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Xerox lenders include

Bank One




(C) - Get Free Report


Chase Manhattan


and Chase merger partner

J.P. Morgan

(JPM) - Get Free Report

. Should Xerox's liquidity problems worsen, as many analysts expect, the banks could face losses if the company restructures or defaults on its debts. The banks declined to comment on the matter.

The Syndicate

The banks arranged a $7 billion backstop credit line to the company in 1997, long before it ran into its recent operational trouble, according to trade publication

Bank Loan Report

. Analysts say as many as 20 banks participated in the credit.

Xerox began drawing down the facility, which comes due in October 2002, in recent months after those operating problems caused its stock to plunge and shut it out of the commercial paper market, which large companies often use to fund daily operations. Xerox had drawn down some $5.3 billion of that credit line through October.

"It's usually never a good sign when a company draws down a

backup line of credit," says Stephen Gresdo, managing director of a hedge fund and co-founder of

. "It's a last resort."

After being left for dead more than once in past decades, Xerox had been enjoying solid profit growth and a rising stock as recently as two years ago. Then it hit a wall of flat revenue growth and weak earnings that resulted in a string of profit warnings and a loss in the third quarter. The most recent loss also coincided with a restructuring announcement, though observers have been skeptical about the company's ability to execute the proposed turnaround.

Banking It

Syndicated loans, which are large loans shared by three or more institutions, have recently proved problematic for banks that participate in them.

Bank of America

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, one of the leading syndicated lenders in the country, recently said it expects troubled assets to rise in the fourth quarter. There is considerable concern that credit problems are only getting worse as banks tighten up amid the backdrop of a slowing economy.

Apart from the banks themselves, few people know exactly how much liability is on which bank's balance sheet, making exposure tough to gauge. But it stands to reason that the loan will certainly prove troublesome for some participants if it goes bad. David Berry, banks analyst at

Keefe Bruyette & Woods

, doesn't think the loan will be a "meaningful issue" for Citigroup or Chase because of their size, as well as the large number of participants. Still, he says Chase and merger partner J.P. Morgan could together have a decent chunk of the loan, "all other things being equal." (Berry rates Citigroup a strong buy and Chase a hold.)

"Another question is to compare the loan sizes to the size of the banks," says Berry. "A dollar to Citigroup is a lot less meaningful" than it is to a smaller bank. Speaking in general terms, Berry says corporate reliance on a backup credit is "indicative of broader trends where companies are starting to draw down their working credit lines a little more often. That could be problematic" for banks.


In a research note released Monday,

UBS Warburg

analyst Benjamin Reitzes said the Moody's downgrade triggered further cash outlays for Xerox, to meet rising interest costs, and is "only fueling the company's downward spiral."

"The company has little wiggle room to satisfy its liquidity needs," Reitzes wrote.

Gimme Credit

analyst Carol Levenson wrote in her newsletter that while Xerox intends to raise $2 billion to $4 billion via asset sales, negotiating a sale will grow steadily more difficult as the company's need for cash becomes more dire. "And by our calculations, Xerox needs this cash very, very badly," wrote Levenson.