Xerox’s IP-Backed JV Financing May Have Used Split-Ownership, Nonsubsidiary Structure to Circumvent Debt, Leakage Caps Under Secured Debt Documents

Credit Research: Anton Gorbounov Legal Analysis: Julian Bulaon Key Takeaways The recently announced Xerox deal-away transaction used a relatively novel “joint venture” structure to effectuate a drop-down of some of the company’s intellectual property. We believe that the transaction structure implies that the company took a view that the new JV was not a “subsidiary” under the company’s indentures and term loan credit agreement and therefore is not subject to the restrictive covenants in those documents. We also believe the company relied on the “recycling” capacity of some of its investment baskets to effectuate this transfer. The transaction provides Xerox with significant additional liquidity and effectively primes the existing debt by reallocating more than $100 million of top-line cash flow away from the remaining Xerox structure, increasing gross and net leverage in the process. We believe the IPCo transaction does not foreclose the possibility of a consensual liability management exercise in the future, with a more comprehensive deal continuing to be the most logical path for the company to address its capital structure. A high-level summary of the company’s capital structure, pro forma for the IPCo transaction, is shown below: (Click HERE to enlarge.) Xerox Likely Used JV Structure to[...]