Xerox Goes Lower Still as Cash Crunch Worsens

The stock hits a longtime low after a debt downgrade has investors wondering about solvency.
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You might have expected Friday to mark rock bottom for

Xerox

(XRX) - Get Report

. That was the day

Moody's

cut Xerox debt to junk status and investors, spying a cash-hungry company struggling to raise capital, knocked 8% off the stock.

But Monday the slide only steepened. Xerox slipped $1.25, or 20%, to $5 Monday. It was the most active stock on the

New York Stock Exchange

as investors, said by traders to be fretting over the risk of bankruptcy, pushed the stock to an 18-year low. Xerox, for its part, says it fully expects to return to good health and that it will press on through the financing worries.

Out of Toner
Xerox at longtime lows

Still, the document company is strapped for cash, and the downgrade of $11 billion of its debt clearly puts it in a tighter squeeze. As the rating agency itself pointed out, the drop to junk status may force Xerox to repurchase $110 million in derivative agreements and to refinance up to $315 million in accounts receivables previously sold. Moreover, when Moody's acts,

Standard & Poor's

is never far behind -- and if S&P cuts Xerox's bonds to noninvestment grade, Xerox may be forced to make additional repurchases.

"I would expect S&P to sooner or later downgrade them to junk," says Steve Michaels, the managing director at

Financial Management Advisors

. "It's obvious these bonds are trading as high yield. Actually, as distressed high yield."

Stretching

As it stands, Xerox will need to stretch to make good on debt obligations and fund operations. Moreover, because of the junk status, it is going to be extremely difficult for the company to raise any money in the debt markets. The company says that it will be able to meet its cash needs.

"We are engaged in negotiation with some third parties to secure incremental financing, such as bridge financing, or borrowing," says a company spokeswoman. "We are moving aggressively forward with asset disposition that will generate cash."

Asset disposition means Xerox selling half of its 50% stake in

Fuji Xerox

to venture partner

Fuji Photo Film

, and selling it quickly. (Xerox also has some finance assets, but these will be harder to shop.) This sale, which could net Xerox $1.5 billion before taxes, has been expected for some time. So far, despite the company's "aggressively moving" to get it done, the deal hasn't happened -- even though it was all but announced in the

Nihon Keizai Shimbun

, Japan's leading business daily, a month ago.

It may be that Fuji, knowing that Xerox needs to make the sale, is driving a hard bargain. As part of the joint-venture agreement, Fuji Xerox isn't allowed to sell products to the U.S. or Europe. It may seek to remove that restriction -- which could result in a tougher business environment for Xerox.

For all these worries, it seems like Xerox will, through asset sales on which it may not get the world's most favorable prices, be able to make good on its commitments and pay its bills -- at least for the short term. But then there's the long term. In October 2002, Xerox's $7 billion revolving credit agreement comes due. Xerox had borrowed $5.3 billion against that as of Oct. 31, according to its latest 10-Q.

October 2002 seems like a long way off, but every day that mountain of debt lumbers a little closer. And lenders, aware of that, will become more reticent to give Xerox any funding. If Xerox doesn't move to restructure its debt -- and by nearly all accounts, other than the company's, it should -- investors' worries will only continue to mount.