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

A high-level summary of the company’s capital structure, pro forma for the IPCo transaction, is shown below:

The structure of the transaction, as so far disclosed by Xerox, is as follows:

• Xerox Corp. and a TPG Credit-led consortium entered into a “joint venture agreement” to establish a new entity called XRX Brandco Holdings LLC, or IPCo Holdings. The exact economic and/or voting ownership structure of IPCo Holdings has not yet been disclosed.
• TPG provided $450 million of financing to IPCo Holdings, comprising a $405 million term loan and $45 million of Class A units, which are referred to as “preferred equity” in the press release and the IPCo credit agreement.
• Xerox Corp. contributed certain intellectual property, including the Xerox trademark, to IPCo Holdings, receiving Class B units of IPCo Holdings in return. It is unclear if the Class B units are common equity or another class of preferred equity.
• IPCo Holdings distributed the financing proceeds of $450 million to Xerox Corp., with the term loan proceeds explicitly being an “equity distribution” of IPCo Holdings. IPCo Holdings also appears to have contributed the IP received from Xerox to its wholly owned subsidiary, XRX Brandco LLC, or IPCo, which is a guarantor of the new IPCo term loan.
• Subsequent to the deal closing, Xerox Corp. contributed $4.75 million of equity capital to IPCo Holdings. The credit agreement also obligates Xerox Corp. to contribute another $10 million of common equity prior to April 9, 2026, which is conditionally redeemable before the 18-month anniversary of the funding of the term loan.
• Xerox Corp. and Xerox Holdings then entered into a shared services and license agreement with IPCo Holdings and IPCo, under which IPCo licenses the contributed IP back to Xerox, in exchange for a royalty fee equal to 2% of “specified consolidated revenue,” among other things.

A number of key documents that appear to describe the IP contributions and IPCo governance in more detail, including, in particular, the amended and restated limited liability company agreement of IPCo Holdings, were not filed publicly.

We show our view of Xerox’s org charts before and after the transaction below:

As previously discussed, we believe Xerox can only transfer up to $370 million to, and can only incur up to $100 million of, indebtedness “for borrowed money” at its nonguarantor subsidiaries under its first and second lien note indentures. It is also prohibited from transferring “Material Intellectual Property” to unrestricted subsidiaries under the J.Crew blockers in the same indentures and its term loan credit agreement.

It is apparent that the company is taking the view that this new secured financing, which exceeds these caps in both quantum of debt and value transferred, and, in our opinion, involves a transfer of material IP, is not subject to those constraints. We believe that the “joint venture” structure was potentially employed specifically to get around the definition of “Subsidiary” in the company’s existing debt documents, which would make it de facto unrestricted (as covenants, including the J.Crew blockers, only apply to the issuer and its restricted subsidiaries). This is consistent with Octus’ recent reporting on the deal.

For example, the second lien notes indenture defines a “Subsidiary” as “any … entity of which more than 50.0% of the total voting power … is at the time owned or controlled … by .. such Person” (emphasis added). The definition in the term loan credit agreement is similar, relying on the greater-than-50% voting control test. As these definitions reference voting power splits alone, rather than a broader concept of control, it is possible that Xerox structured IPCo Holdings in a way that gave equal or majority voting rights to the third party while leaving Xerox with operational control and the full common equity economics of the entity. Notably, the definition of “Subsidiary” in the IPCo credit agreement is broader and includes a “control” prong in addition to voting power (“entity of which a majority of the shares of securities or other interests having ordinary voting power … are at the time beneficially owned, or the management of which is otherwise controlled” by a parent entity) (emphasis added).

Although most LME structures involving org chart manipulation generally use nonguarantor restricted subsidiaries or unrestricted subsidiaries, the use of a “non-sub” as a means to circumvent debt document restrictions is not unheard of. Indeed, similar maneuvers have been employed to different ends by Robertshaw (where a split ownership structure was used to circumvent a Wesco / Incora blocker) and Trinseo (where a sister-level “non-restricted affiliate” was established as the primary obligor on the pari-plus financing). That said, non-sub financings remain relatively rare, and if Xerox did, in fact, use a non-sub for this transaction, it would, in our view, represent a meaningful escalation in aggressive deal-away tactics.

As the IPCo supports $450 million of external financing, it is reasonable to assume that the fair market value of the contributed IP exceeds $450 million by some margin. This, in turn, means that Xerox had to have enough investment capacity to contribute over $450 million of value into IPCo.

We believe the term loan credit agreement is the most restrictive in determining the company’s JV investment capacity, as the investment and restricted payment baskets in its credit agreement are meaningfully tighter than those in the 2025-vintage indentures. Notably, there is no general RP basket, and the concept of a “Shared Investment Cap” prevents the company from adding the JV and the general investment baskets. In addition, on the basis of our preliminary calculation, shown below, we estimate that the “available amount” basket under the term loan is approximately $192 million. Finally, the company could potentially use the $285 million available under the D&O repurchase and dividend baskets to further increase investment capacity.

If our estimate of the available amount basket is correct, the company likely had enough JV capacity to contribute up to $737 million of value to the JV without any further adjustments. We believe that the company may have also “recycled” basket capacity to be able to contribute more value to the IPCo. The available amount basket under the term loan includes 100% of “aggregate returns” received on any investment made using this basket. For example, if the company wanted to reserve the dividend / repurchase basket capacity, it could have contributed IP with fair value of approximately $452 million ($260 million plus $192 million) in the first step to the IPCo, then used some of the $450 million it received from IPCo to refill that basket and then contributed another approximately $192 million worth of IP into the JV. The theoretical IP value of $643 million after these two steps implies a loan to value of 63% for the term loan and 69% for the preferred.

The exact mechanics of the IP contribution have not been disclosed publicly; however, the above is consistent with certain unusual terms in the IPCo credit agreement, which includes references to two separate IP contributions, which are not publicly defined. “First IP Contribution” is listed as a condition precedent to the transaction, and “Second IP Contribution” is referenced in the “events of default” section, which prescribes that such a transaction must take place immediately after the incurrence of the term loan and the distribution of proceeds. Finally, the term loan agreement stipulates that all of the proceeds from the term loan are to be immediately distributed as an equity distribution to Xerox Corp., despite the fact that IPCo Holdings is nominally a joint venture. We see no other purpose for the two-step IP contribution other than to replenish basket capacity under the existing secured debt documents.

This apparent recycling highlights another potential vulnerability – the Available Amount basket (and other baskets with a similar “recycling” capacity, highlighted in the table above) can theoretically be refilled again and again, until the value of the contributed assets can no longer support the debt at the entity.

As the transaction was based on a subset of the company’s assets and resulted in a large cash infusion, we view it as ultimately priming with respect to the company’s legacy debt. The exact quantum of “subject revenue” for the calculation of pro forma royalty expense has not been disclosed by the company. We estimate, however, that such expense would have been approximately $121 million in 2025, assuming all legacy Xerox (approximately 76% of sales) was subject to the 2% royalty rate, as shown below. We believe that Xerox stakeholders that do not have direct exposure to the IPCo should view this expense as a direct reduction to their EBITDA, although the company likely has some discretion in how it accounts for this new structure in their income statement.

Taking the $121 million of estimated LTM royalty expense out of EBITDA results in an increase in gross leverage at all levels of the structure and in a 0.6x increase in total net leverage, as shown in the capital structure at the beginning of this article.

Alternatively, looking at the IPCo debt and Class A preferred equity as priority debt that ranks functionally ahead of the company term loan (but keeping the underlying EBITDA constant) results in a 0.7x across-the-board increase in gross leverage, though net leverage does not change, as shown below:

Applying the same “subject revenue” ratio and the 2% royalty rate to our previously published model reduces cash flow available to the Xerox RemainCo by approximately $100 million in 2026 and $109 million in 2027, as shown below. Under these assumptions, the IPCo structure appears to generate virtually no cash flow after debt service through the end of 2027, with royalty cash flows just covering the interest payments and the quarterly 4.5% amortization schedule. Furthermore, the IPCo term loan mandates that 100% “Quarterly Excess Cash Flow” must be swept to pay down the term loan. This further supports our view that the IPCo royalty expense should be thought of as a 1:1 reduction in cash EBITDA.

The IPCo deal clearly provides Xerox with significant liquidity and some currency to potentially address its near-term maturities. For example, its $750 million of senior notes due 2028 are trading in the low 40s, implying total market value of $315 million and $435 million of potential discount capture. We believe the quantum of the capital raised, however, is likely not enough to meaningfully deleverage or fully term out its maturity wall. As a result, we continue to believe that a more comprehensive deal involving multiple classes of creditors is the most logical path forward.

We also believe that the new IPCo transaction does not, by itself, foreclose the possibility of a more comprehensive transaction. For example, a hypothetical consensual deal involving an “NGRS dropdown,” as described in our in-depth analysis last week, is still possible under the documents; the only thing that has potentially changed is the quantum of assets that can be “dropped down” without running up against “all or substantially all” issues. We also believe that a non-pro-rata consensual deal involving the same four key creditor constituencies can be structured around the new IPCo JV structure rather than an NGRS.

Finally, it is theoretically possible for the company to unwind the IPCo transaction, fold the IP back into Xerox Corp. and pursue a more comprehensive deal on that basis. While this would be unusual, other issuers have unwound drop-down structures in the past. The new term loan includes an unusual call protection schedule that steps down monthly for the first year, to 3.875% from 10.25% of the loan balance. This may suggest that a possibility of an unwind was factored into the documents at the outset, though such an unwind would be fairly costly for the issuer.

As previously reported, a Gibson Dunn-advised group of the company’s creditors is in the process of socializing a cooperation agreement, suggesting that the creditors are preparing for continued engagement with the company.