Xerox 2005 Annual Report Download - page 51

Xerox Corporation
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Loan Covenants and Compliance: At December 31, 2005, we
were in full compliance with the covenants and other provisions of
the 2003 Credit Facility, the Senior Notes and the Loan Agreement
and expect to remain in full compliance for at least the next twelve
months. Any failure to be in compliance with any material provi-
sion or covenant of the 2003 Credit Facility or the Senior Notes
could have a material adverse effect on our liquidity and operations.
Failure to be in compliance with the covenants in the Loan Agree-
ment, including the financial maintenance covenants incorporated
from the 2003 Credit Facility, would result in an event of termination
under the Loan Agreement and in such case GECC would not be
required to make further loans to us. If GECC were to make no
further loans to us and assuming a similar facility was not estab-
lished and that we were unable to obtain replacement financing
in the public debt markets, it could materially adversely affect our
liquidity and our ability to fund our customers’ purchases of our
equipment and this could materially adversely affect our results of
operations. Wehave the right at any time to prepay without penalty
any loans outstanding under or terminate the 2003 Credit Facility.
Capital Markets Offerings and Other: In August 2004, we issued
$500 million aggregate principal amount of Senior Notes due
2011 at par value and, in September 2004, we issued an addi-
tional $250 million aggregate principal amount Senior Notes
due 2011 at 104.25% of par.These notes, which arediscussed
further in Note 11 – Debt in the Consolidated Financial Statements,
form a single series of debt. Interest on the Senior Notes accrues
at the annual rate of 6.875% and, as a result of the premium
we received on the second issuance of Senior Notes, have a
weighted average effective interest rate of 6.6%. The weighted
average effective interest rate associated with the Senior Notes
reflects our improved liquidity and ability to access the capital
markets on more favorable terms.
In December 2004, we completed the redemption of our liability
to the Xerox trust issuing trust preferred securities. In lieu of cash
redemption, holders of substantially all of the securities converted
$1.0 billion aggregate principal amount of securities into 113
million shares of our common stock. As a result of this conversion
and redemption, there is no remaining outstanding principal.
This redemption, which had no impact on diluted earnings
per share, is discussed further in Note 12 to the Consolidated
Financial Statements.
Credit Ratings: Our credit ratings as of December 31, 2005
were as follows:
Senior
Unsecured
Debt Outlook Comments
Moody’s (1), (2), (6) Ba2 Positive The Moody’s rating was
upgraded from B1 in
August 2004. The outlook
was upgraded to positive
in September 2005.
S&P(3), (4) BB- Positive The S&P rating on Senior
Secured Debt is BB-. The
outlook was upgraded
to positive in April 2005.
Fitch(5) BB+ Positive The Fitch rating was
upgraded from BB in
August 2005.
(1) In December 2003, Moody’s assigned to Xerox a first-time SGL-1 rating.
This rating was affirmed in August 2004.
(2) In August 2004, Moody’supgraded the long-term senior unsecured debt
rating of Xerox from B1 to Ba2, a two-notch upgrade. The corporate rating
was upgraded to Ba1.
(3) In April 2005, S&P launched a short-term speculative-grade rating scale and
assigned to Xerox a first-time B-1 rating.
(4) In April 2005, S&P upgraded the long-term senior unsecured debt rating of
Xerox from B+ to BB-, a one-notch upgrade. The corporate rating was affirmed
as BB- and changed its Outlook from Stable to Positive.
(5) In August 2005, Fitch upgraded the senior unsecured debt of Xerox from BB
to BB+, and also upgraded the Trust Preferred securities from B+ to BB-, both
one-notch upgrades. The corporate rating Outlook was affirmed as Positive
and affirmed the Secured Bank Facility at BBB-.
(6) In September 2005, Moody’schanged its Outlook from Stable to Positive.
Our credit ratings, which areperiodically reviewed by major
rating agencies, have substantially improved over the past two
years. As described in the above table, Moody’s and S&P have
made positive rating upgrades during the 2005 annual period.
In January 2006, S&P placed our rating on Credit-Watch Positive,
indicating a review of the credit with positive implications within
the coming 30 days. Even though as of February 2006, our
current credit rating still remains below investment grade, we
expect our management strategies will return the Company to
investment grade in the future.
Xerox Annual Report 2005