Xerox's senior unsecured notes downgraded to 'B' by S&P Global

S&P Global Ratings downgraded Xerox Holdings Corp.'s senior unsecured notes to 'B' from 'B+' and assigned a '5' recovery rating (10%-30% recovery) following the Lexmark acquisition, citing increased secured debt that lowers recovery prospects for unsecured noteholders. The agency maintained a 'B+' issuer credit rating with a negative outlook, reflecting concerns over integration risks, print industry challenges, and execution in returning to organic growth. S&P projects Xerox's 2025 adjusted leverage at approximately 5x and core free operating cash flow to debt at about 1%, noting minimal cushion at the current rating level and potential for further downgrades.

Analysis

S&P Global Ratings has downgraded Xerox's senior unsecured notes to 'B' from 'B+', a direct result of the increased secured debt within the capital structure following the Lexmark acquisition. This structural change materially weakens the position of unsecured noteholders, with S&P assigning a '5' recovery rating, indicating an expected recovery of only 10%-30% in a potential default scenario. While the issuer credit rating was affirmed at 'B+', it carries a negative outlook, signaling a significant risk of a future downgrade. This outlook is underpinned by S&P's concerns over execution risks in Xerox's strategy to achieve organic growth, challenges in integrating Lexmark, and persistent secular headwinds in the print industry. The agency's projections for 2025 quantify these risks, forecasting a revenue decline of approximately 1%, adjusted leverage of roughly 5x, and a very low core free operating cash flow to debt ratio of about 1%. The minimal cushion at the current rating level suggests that any operational shortfalls or integration difficulties could promptly trigger a further downgrade.

Key Decisions for Investors

• Investors holding Xerox's senior unsecured notes should re-evaluate their position given the credit downgrade to 'B' and the sharply reduced expected recovery of 10-30% in a default scenario.
• The negative outlook and projected 5x leverage ratio warrant extreme caution; monitor quarterly execution on the Lexmark integration and progress toward organic growth, as any misstep could precipitate a further downgrade.
• Consider the significant divergence in risk across Xerox's capital structure, where first-lien debt retains a 'BB' rating and 90%-100% recovery prospects, in contrast to the high-risk profile of the unsecured notes.