Xerox Corp. (XRX) Ratings Placed on Review for Downgrade by Moody's Amid Separation Plans

Moody's Investors Service ("Moody's") has placed the ratings of Xerox Corp. (NYSE: XRX) under review for downgrade following Xerox's announcement of its plan to divide into two separate, publicly traded companies, comprised of its Document Technology ("DT") and Business Process Outsourcing ("BPO") businesses. The ratings placed under review include the Baa2 senior unsecured and P-2 short term ratings.

RATINGS RATIONALE

The rating review reflects Moody's view that Xerox's planned separation will result in two smaller companies with less business diversity and profitability than the current combined business. Xerox has not announced capitalization plans for DT or the BPO units post-spinoff, nor how much of its $1.4 billion in cash will be allocated between the two companies. Moody's review will focus on the post-spin capital structure, liquidity profile, shareholder return policies, future operating strategy, competitive positioning and growth prospects of the businesses. The review will also consider the smaller scale and reduced diversification post-spin, as well as the financial performance of each business and the impact of the announced three year $2.4 billion cost reduction plan.

Post separation, Xerox's DT business will have over $11 billion in revenues, while BPO will have over $7 billion in revenues, based upon 2015 revenue. DT will also include the document outsourcing business that is currently reported in the BPO segment, which should at least partially offset the ongoing high single digit sales declines at DT, driven by the transformation of the print industry. Due to the importance of providing financing assistance to its customers, Moody's expects Xerox to capitalize the DT unit in line with conservative financial metrics.

Xerox intends to maintain the BPO unit's focus on strategic markets including transportation, healthcare, commercial and government services. BPO generally has greater revenue visibility and the contractual nature of its customer relationships drive high recurring annuity-like revenues. BPO operating costs have been rising as a result of the investment in labor, training and capital resources that are made by Xerox to facilitate new customer programs before they fully ramp. Additionally, Xerox has experienced setbacks in system implementations, most recently in its healthcare segment with the cancellation of Health Enterprise Medicaid platform implementations in California and Montana.

Moody's expects that Xerox's ratings will remain under review for downgrade until the spin-off has substantively been completed, expected towards the end of 2016. Depending on the allocation of the debt between the two entities, a downgrade of one or more notches is possible.

Rating actions:

Issuer: Xerox Corporation

Commercial Paper -- P-2 Under Review for Downgrade

Senior Unsecured Debt -- Baa2 Under Review for Downgrade

Senior Unsecured Shelf - (P)Baa2 Under Review for Downgrade

Senior Unsecured MTN - (P)Baa2 Under Review for Downgrade

Senior Unsecured Bank Credit Facility - Baa2 Under Review for Downgrade

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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