With Majority Consent From a Subset of Creditors, Xerox Could Pursue Non-Pro-Rata Drop-Down to Effectuate Balance Sheet Restructuring

Xerox has more than $4.2 billion of debt trading at a weighted average price of 52, all of which currently yields double digits, implying the market views its capital structure as unsustainable, while also indicating that the company has the theoretical opportunity to capture more than $2 billion of debt discount. As we discussed previously, Xerox’s near-term liquidity outlook is also subject to a variety of significant swing factors outside of its control, and we view the likelihood of an out-of-court financial restructuring to be high.

Our hypothetical two-step LME envisions an ad hoc group comprising majorities of the four relevant tranches relaxing the covenants on the debt they hold to allow (1) a drop-down of a subset of assets into a newly created nonguarantor restricted subsidiary, or NGRS, and (2) incurrence of additional pari-plus secured debt. The group would then exchange its holdings into new pari-plus debt that would receive guarantees from the new NGRS and retain its existing claims. This structure can also be used to facilitate a structurally senior new-money component.

With secured baskets relaxed following the first step, Xerox can then pursue an uptiering exchange to tackle its 2028 and 2029 maturities and/or capture discount.

Our updated model, available for download HERE, now includes an LME tab (available separately HERE), where subscribers can vary the many assumptions we make in this piece.

A Drop-Down Combined With a Pari-Plus Structure May Help Solve Xerox’s Problems

As previously discussed by Octus Covenants, the financing package Xerox raised for its Lexmark acquisition includes seemingly strong LME blockers, designed to protect bondholders against both a “deal away” and a non-pro-rata “consensual” LME. Xerox has very limited capacity to issue new secured and/or structurally senior debt, according to our calculations.

Importantly, in order to effectuate a meaningful consensual LME, the company needs to corral majorities of at least four different debt issues – namely its term loan, both of its series of secured notes and its 13% unsecured notes due 2030 (which share most of the restrictive covenants with the secured notes). We believe that this is a tall, but ultimately surmountable, hurdle. According to sources, an ad hoc group of creditors with holdings across most of these tranches is currently in discussions with the company.

Assuming majority consent can be obtained from all tranches of secured debt and the holders of 13% unsecured notes, we envision the following comprehensive, two-step consensual LME. First the company would raise additional capital and receive maturity extensions on some of its debt through a non-pro-rata exchange, setting the stage for a follow-on transaction that would target the remainder of the company’s debt.

Step One: The Set-Up

1A: Contribution of a Subset of Assets to a New Nonguarantor Restricted Subsidiary, Releasing Liens

Both of Xerox’s secured bond indentures and its credit agreement provide that releases of “all or substantially all,” or AOSA, of Xerox’s collateral are a sacred right. However, releases of less than AOSA collateral are not sacred and are permitted with majority consent. Case law on what constitutes AOSA does not have a bright-line quantitative test, but in our survey of relevant cases, we have found that transactions involving less than 50% of some measure of value (revenues, assets, operating income) have been mostly deemed to constitute less than AOSA. In Xerox’s case, we see a number of specific, separable assets and/or businesses that would pass this less-than-50% heuristic, including:

• Lexmark, which accounted for approximately 26% of 2024 pro forma revenues and approximately 28% of Xerox’s post-combination pro forma assets as of Mar 31, 2025;
• Assets of Xerox Financial Services, including financing receivables and equipment on operating leases, which together constituted approximately 17% of total assets as of Dec. 31, 2025;
• IT Solutions Business, which generated 10.8% of revenues in 2025; and
• Intellectual Property, with Xerox reporting intangibles worth approximately 9.4% of total assets as of Dec. 31, 2025.

In our analysis, we assume that Xerox contributes assets with a fair market value of $1 billion to a newly created NGRS, releasing the liens over those assets in the process, though we do not take a view on which assets may be contributed. As shown below, this is approximately 48% of the market-implied valuation of the Xerox enterprise as of Feb. 12, 2026, which has an enterprise value of $2.1 billion net of its $400 million in pro forma cash. We purposefully avoid taking a view on valuation of Xerox; rather, we use the total market value of Xerox’s debt and equity as the starting point for our valuation considerations in this piece.

Unlike the limitations on transfers to unrestricted subsidiaries, the $370 million cap on transfers to nonguarantor restricted subsidiaries is not a sacred right under the three relevant indentures.

A majority of noteholders of each series of secured noteholders can amend this cap to permit unlimited investments in NGRS. The company could then contribute the assets described above to an NGRS, which we believe would likely have to be newly created and foreign-domiciled, in order to avoid triggering any future guarantor clauses under any debt documents not included in this part of the transaction.

In our hypothetical transaction, the newly created NGRS will have assets with a value of $1 billion, while assets with an estimated value of $1.5 billion, including the $400 million in pro forma cash, will stay at the RemainCo.

Separately, in order to be able to grant new liens over the NGRS, and to give itself flexibility to target the unsecured bonds in the next step, Xerox would need to relax all of its secured debt baskets under all of its relevant documents, including the $2 billion secured debt cap present in all three affected indentures, with the exact quantum of the change a function of the exact transaction structure. For this illustrative example, we assume that enough capacity is unlocked to facilitate both steps of the transaction. Finally, future guarantor language in the relevant documents may need to be amended to carve out the new NGRS from any requirements to guarantee any of the affected debt held by creditors outside of the ad hoc group. We summarize the amendments required in the table below; we also highlight the provisions that would impact the company’s ability to perform the NGRS drop-down on a non-pro-rata basis.

Finally, all of these actions would have to remain in compliance with all indentures not amended in this step of the transaction. One important constraint is the language prohibiting guarantee releases, present in most of these indentures, which we believe will be unaffected by the structure of the transaction involving an asset transfer and a newly formed nonguarantor subsidiary. We summarize the other constraints below for each of the tranches not amended in the first step:

We exclude covenant considerations for both the ABL and the 13% senior notes due 2026 from our analysis as we implicitly assume that the relative seniority of the ABL will be unaffected by this transaction (and any amendments that may be required to effectuate it can be easily obtained), while the 2026 notes are likely to be paid and/or defeased early, given their short maturity.

1B: Potential New Money

We believe Xerox may require additional liquidity throughout 2026, depending on the timing and quantum of multiple swing factors. In this illustrative example, we assume a relatively modest facility of $200 million to be provided by some or all of the members of the ad hoc group that should provide the company enough of a buffer in the near term. For simplicity, we assume that this new money remains at the new NGRS, increasing its valuation to $1.2 billion.

1C: In-Group Uptier

Once the new structure is set up, Xerox can effectuate an exchange of the ad hoc group’s paper into a new “pari-plus” structure that would look to the new NGRS for collateral support while retaining its claims on the RemainCo.

The exact exchange ratios and priorities will ultimately be a function of the group size, the value of assets contributed to the NGRS and inter-group dynamics. As a starting point, we assume that the contemplated Step One exchange would be open to ad hoc group members only – we believe that not enough value will be contributed to the NGRS (to comply with the AOSA test) to share it more broadly, and, more importantly, shifting value away from non-ad-hoc group creditors should allow the company to capture more discount in Step Two, all else equal. Beyond that, we assume the following:

• The new money loan will have a first lien over the NGRS collateral and a first lien over the RemainCo;
• The existing secured debt held by the ad hoc group would be exchanged in the order of priority at par, with the first liens taking a second lien over the NGRS assets, and the second liens taking a third lien at the NGRS (while retaining their existing claims on the RemainCo);
• The unsecured notes due 2030 held by the ad hoc group exchange into the same package as the second liens, at a modest discount to par; and
• In order to effectuate the exchange on a non-pro-rata basis, the term loan exchange would likely have to be structured as an extend-and-exchange offer (see our discussion of the term loan covenants HERE). This would also serve to extend a portion of the 2029 maturity wall.

It is also possible that the exchange described above will include a portion of the senior notes due 2028, depending upon the cross-holdings of the group members. To keep this piece of an already complex hypothetical relatively simple, we do not assume any 2028s are exchanged in the first step; however, our exchange model can be toggled to include it.

The tables below illustrate the ad hoc group exchange assuming the group has 60% of every relevant class.

The chart below illustrates collateral priorities for this new structure:

Finally, a highly simplified point-in-time waterfall (using our implied business valuation as described earlier and looking ONLY at funded debt) would change as follows:

Allocating claim recoveries across various tranches would yield the following:

As shown above, Step One of our hypothetical LME can allocate significant value away from the non-ad-hoc group secured stack. In fact, under the assumptions described, the second liens would be significantly impaired before marshalling excess recovery away from the new pari-plus debt, and the unsecured notes would see no direct recovery.

Step Two: The Follow-On Exchange

Once the company has completed the drop-down of assets into the NGRS, it can pursue a comprehensive exchange targeting its non-participating debt. With secured baskets sufficiently relaxed and at least nine different non-group tranches trading at a discount, the exact shape and form of the discounted exchange is an exercise in the art of the possible.

However, given what we see as the company’s twin goals of maturity extension and discount capture, we envision the company initially targeting its first two big unsecured maturities – the remaining notes due 2028 and the 8.875% notes due 2029 – for a discounted exchange, as well as any term loan not included in the first step. The table below illustrates just one such hypothetical exchange scenario, which would allow the company to capture more than $500 million of discount and push out its maturity wall post 2030, assuming full participation.

A Deal Away Is Possible or Could Just Be a Useful Negotiating Tactic

According to recent news reports, Xerox may have also been considering a “deal away,” potentially centered around the company’s IP. While we don’t believe there is enough capacity for a deal away to completely solve the company’s balance sheet problems, it is an option to generate near-term liquidity, extending the company’s runway. A credible “threat” of a deal away can also be a useful tool to corral creditors who may otherwise be unwilling to engage with the company on a comprehensive consensual solution. Based on our understanding of the secured debt documents, we see at least two potential paths to a deal away.

NGRS Preferred / Pluralsight-Lite

According to our calculations, the company currently has approximately $174 million in first lien capacity under its first lien indenture and term loan credit agreement, while it may be fully tapped out of first lien capacity under the second lien indenture (as the second lien indenture includes an assumed full draw of the ABL in its calculation of first lien leverage ratio). As noted above, Xerox does have the capacity to invest $370 million in an NGRS, and its existing nonguarantor subsidiaries accounted for 26% of pro forma 2024 sales, according to the bond offering memorandum. However, it is limited to just $100 million of “Indebtedness for borrowed money” at nonguarantors. The “for borrowed money” part is key: The company can pursue an alternative structure (such as a preferred investment, akin to the structure originally employed by Pluralsight); it could also take the view that “for borrowed money” definition actually excludes bonds, as discussed in our secured notes report HERE. In either case, getting away from the “for borrowed money” definition would allow it to use the larger $370 million “Shared Debt Cap,” as defined in the relevant indentures.

Finance Receivable Sale

A more comprehensive “deal away” structure could revolve around the approximately $1.4 billion of finance receivables that Xerox retains on its balance sheet as of Dec. 31, 2025. To date, Xerox has largely pursued sales of newly originated receivables, letting the on-balance-sheet book run off organically. However, these assets appear theoretically monetizable at a level close to their book value.

It is our understanding that these receivables constitute collateral for the company’s secured debt. If Xerox were to pursue a large sale outside of the ordinary course of business, it would likely trigger the asset sale sweep under the term loan credit agreement, which prescribes a 10-day “shot clock” and no reinvestment rights. The company’s secured notes also have relatively strong asset sale provisions, though with a longer repayment period. However, any debt so repaid would open up a roughly equivalent amount of secured debt capacity, which the company can use to raise liquidity or facilitate a larger exchange of its unsecured notes.

Xerox Corporate Structure Is More Complex Than Most LevFin Issuers

As a former multinational investment grade company that has gone through multiple corporate actions, Xerox’s org chart is more complex than most leveraged finance issuers – and much more nuanced than what is presented in its most recent bond OM. The chart below was reconstructed by cross-referencing (1) subsidiary information in statutory accounts for Xerox’s U.K. and Belgian subsidiaries, (2) charging documents filed by the same, (3) the company’s offering documents, and (4) trademark and patent assignment documents filed with the U.S. Patent and Trademark Office.

Notable aspects of the company’s structure include the following:

• Holdco / opco structure at the top, dating back to the Conduent spinoff transaction, with Xerox Holdings Corp. (“Holdings” or “Holdco”) acting as a finco issuer for the company’s post-2017 bond issuances.
  • The basic structure is that Holdings on-lends issuance proceeds to Xerox Corp. (“Corp.”) via a matched intercompany loan, and Corp. then guarantees the issuance, creating a double dip claim against Corp. for Holdings bonds. The biggest implication is that bonds issued by Holdings stand to receive better recoveries than the “legacy” Corp. notes (the 2035s and 2039s), to the extent that any value flows up to the Corp. level.
  • Holdings also guarantees all secured debt issued out of Xerox Corp, save the “legacy” notes.
  • Holdings appears to hold minor other interests directly, with most key subsidiaries sitting under Corp.
• The legacy Xerox IP (trademarks and patents) appears to sit entirely at Xerox Corp., per charging documents filed with the Companies House in the U.K. The legacy Lexmark IP is currently at a Lexmark subsidiary (per USPTO filings).

Additionally, the guarantee packages across different issues of Xerox bonds are not presently aligned, given that (1) Xerox’s risk profile deteriorated over time, which led to lenders demanding increasing levels of credit protection and (2) the future guarantor-type clauses in its legacy documents were either written with enough leniency or absent entirely. As a result, the capital structure can be divided into the following categories:

Cash Flow Model Updated to Reflect Lower Expected Revenues in 2026

We have updated our cash flow model, first published last month. As discussed in our earnings note, the company started the year with a slightly higher cash balance than we originally modeled; however, the 2026 top-line guidance was meaningfully lower than our previous base case. Incorporating this new guidance into our model yields a slightly tighter 2026 liquidity picture than in our previously modeled base case and more meaningful ABL utilization throughout the year. The full model, which includes the LME worksheet and the previously published warrant calculator, is available for download HERE.