Fitch: Xerox CDS Spreads at Widest Level Since 2013
OREANDA-NEWS. Soured market sentiment following Xerox Corp.'s announcement last week that it will review its business portfolio and capital allocation options has caused its credit default swaps (CDS) to widen significantly, according to Fitch Solutions. After pricing consistently at 'BBB/BBB-' levels over the past year, Xerox CDS are now trading in below investment grade territory.
Five-year CDS on Xerox widened 18% last week, underperforming the broader North America Technology sector, which was just 2% wider. CDS referencing Xerox are trading 150% wider than they were at the start of the year, driving the cost of credit protection on Xerox's debt to the widest levels observed in more than two years.
Five-year Xerox CDS are trading at 173 basis points, compared with 69 basis points in January 2015. The last time spreads were seen at this level was in April 2013, when they traded at 174 basis points.
Fitch placed the ratings for Xerox on Rating Watch Negative on Oct. 27, affecting $9.6 billion of total debt. The Negative Watch could be resolved and ratings stabilized at current levels if Xerox completes the strategic review without altering financial policies or selling businesses representing material profitability. However, Fitch believes there are limited scenarios that would not result in a likely downgrade. Xerox has a Long-term Issuer Default Rating of 'BBB'.
Xerox declined to provide additional details regarding its review, including when the company expects to conclude it. Fitch believes the examination will contemplate the potential sale of material businesses, separation of the services business or intensified shareholder returns, each of which likely would result in a one-notch downgrade. Fitch anticipates Xerox will manage core leverage (total debt to operating EBITDA excluding the financing business) to maintain investment grade ratings and, therefore, cheaper funding for the financing business.
Xerox announced the review in connection with reporting financial results for the quarter ended Sept. 30, 2015 and updating full year guidance - both of which were slightly below Fitch's expectations. Slowing demand in developing markets for the Document Technology segment, weaker contract signings in the Services segment in recent quarters, and Xerox's exit from new healthcare contracts more than offset growth in Document Outsourcing. Fitch expects these trends will continue, resulting in low- to mid-single digit negative constant currency revenue growth in 2015.