Investing.com -- Moody’s Ratings has confirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) for Xerox Holdings Corporation (Xerox). The B3 rating of Xerox’s backed senior unsecured notes was also confirmed. Moody’s revised the outlook for Xerox to stable, ending a period of review for potential upgrades.

In addition to this, Moody’s assigned a Ba2 rating to Xerox Corporation (NASDAQ: XRX )’s backed senior secured debt facility, which was upsized to $780 million following the acquisition of Lexmark. The Caa1 rating of Xerox’s senior unsecured, unguaranteed notes was also confirmed. Xerox Corporation, a subsidiary of Xerox Holdings Corporation, was also assigned a Ba2 rating for its proposed backed senior secured 1st lien notes and a Ba3 rating for its proposed backed senior secured 2nd lien notes.

The closing of the Lexmark acquisition is anticipated in the second half of 2025, subject to regulatory and shareholder approvals. The ratings assigned by Moody’s assume a successful closing of the acquisition, with no significant changes in the size, terms, or conditions of the transaction.

The acquisition of Lexmark is expected to strengthen Xerox’s market position in the mid-range print and document outsourcing markets. The company will also benefit from recurring revenues tied to its management contracts, regardless of print volumes. The majority of Xerox’s combined revenues with Lexmark will come from recurring post-sale contracts that include managed print services (MPS), supplies, and finance income.

Following the acquisition, Xerox will focus on reducing its reported gross leverage to less than 3x. The company has until August 2028 to achieve this goal, as it needs to refinance $750 million of notes maturing at that time.

The combination of Lexmark’s businesses with Xerox’s is seen as credit positive due to the increased scale and a more balanced print portfolio. The addition of Lexmark will enhance Xerox’s market coverage, particularly in the APAC region, and expand its A3 model supply options.

The Lexmark acquisition is expected to improve Xerox’s debt to EBITDA ratio to less than 5.5x from 5.9x as of December 2024. The company is expected to realize most of its targeted cost savings from the acquisition, which will increase combined operating profits and improve leverage and free cash flow.

Despite the challenges of declining revenues, the combination with Lexmark is expected to lead to more stable revenues for Xerox. However, achieving organic revenue growth may be difficult due to secular challenges. Improvements in credit metrics, including leverage and coverage ratios, will initially come from increasing profit margins.

Xerox’s liquidity is adequate, with about $500 million of balance sheet cash expected at the end of each year for the next two years. To enhance cash balances, temporary advances under the $425 million ABL revolver may be needed, primarily in the first quarter of the calendar year when working capital requirements peak.

The stable outlook incorporates Moody’s expectation that revenue declines, adjusting for acquisitions, will improve to the low single-digit percentage range. Over the two years post-closing of the acquisition, Xerox is expected to achieve most of its targeted cost synergies for the Lexmark acquisition. Adjusted Debt to EBITDA is expected to approach the mid-4x range by the end of 2025.

Moody’s stated that ratings could be upgraded if Xerox shows consistent annual revenue growth, improving profitability and cash flow, and conservative financial discipline. Conversely, ratings could be downgraded if Xerox remains unable to generate organic revenue growth or if operating margins weaken.

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