Interpreting Credit Rating Action

Moody's Investors Service issued the following press release (excerpts) on December 14, 2018, pertaining

to a credit rating action for Xerox Corporation.

New York, December 14, 2018-Moody's Investors Service downgraded Xerox Corporation's senior

unsecured debt ratings to Ba1 from Baa3. The rating outlook is negative. As part of the rating actions,

Moody's assigned Xerox a Ba1 Corporate Family Rating (CFR).

RATINGS RATIONALE The downgrades reflect uncertainty about the company's ability to stabilize

and grow its revenue base over the next few years given the secular decline in copier and printing

demand as well as intense global competition. Xerox reported seven consecutive quarters of year over

year revenue declines on a constant currency basis since the spin-off of the business process outsourcing

segment despite major product launches in 2017.

Moody's expects organic revenues to continue on a flat to declining trajectory over the next 12 to 18

months in the absence of an unlikely fundamental change in the company's revenue mix or market share.

Xerox's Ba1 CFR is supported by the company's good market position in its core mid-range print and

document outsourcing markets as well as solid leverage and free cash flow metrics. Roughly 78% of

Xerox's revenue is derived from post-sale activities that include document outsourcing, managed print

services, maintenance service, supplies (toner and paper), and finance income. These elements come

with higher operating margins and provide some revenue predictability.

The negative outlook reflects the persistent pressures on the company's core copier and printing business

as well as execution challenges. The outlook could be changed to stable if the company demonstrates

progress in stabilizing revenues and if Moody's expects the company will be able to maintain

operating margins and free cash flow generation while keeping leverage in line with current levels.

a. What rating action did Moody's take on Xerox in December 2018?

b. Did the rating action change the investment grade of Moody's debt? (Hint: See Exhibit 7.3.) What is

a likely economic outcome for Xerox?

c. What is the primary rationale for the downgrade?

d. Despite the downgrade, Moody's cites four reasons for the rating to be as high as it i s. What are these

four reasons?