Recent actions by a high-profile ratings agency could put lenders on the hook for a $7 billion credit to Xerox Corp.

Moody’s Investors Service sparked concern among Xerox’s lenders Friday when it downgraded the company’s long-term senior unsecured credit rating to Ba1 from Baa2 and its short-term rating to “not prime” from “prime 2.” Moody’s cited illiquidity, an inefficient cost structure, increased competition, decreased demand, and three restructurings since 1998 as reasons for the downgrading.

Most importantly from a lender’s perspective, the move called into question a $7 billion loan backed by 58 banks. The credit, which was arranged in October 1997, was led by Bank One Corp., Citigroup Inc., Chase Manhattan Corp., and J.P. Morgan & Co., each of which lent Xerox $375 million.

The current quarter has been filled with corporate bankruptcies and big losses on loans to such troubled companies as Sunbeam Corp.

To many market observers, troubles at Xerox are emblematic of the tightening credit picture this year. Moody’s lowered its ratings for Xerox in April for the first time in 15 years. In July the agency placed the ratings under review and ultimately lowered them again in September.

During a conference call Monday, Moody’s said that it would consider downgrading Xerox yet again if the company fails to sell assets by the end of the first quarter and if it fails to secure additional capital. By that time Xerox would probably have drawn down the full $7 billion credit line.

Analysts and investors said the lenders would not classify the loan as nonperforming as long as the Stamford, Conn., document processing company continues to make its interest payments.

Xerox and the lenders arranged the financing when Xerox had investment grade status, and analysts said the company is still in compliance with the terms of the loan. Analysts said they do not expect Xerox to attempt to renegotiate the loan.

But the company is running out of time. It has already drawn about $6.4 billion from the line of revolving credit. To meet its obligations, such as $2.5 billion of debt coming due next year, Xerox will have to sell assets, call in receivables, or turn to banks for more cash.

Xerox has put up for sale assets it says are worth between $2 billion to $4 billion, though private estimates are lower than that.

John Otis, an analyst at Bear Stearns & Co., said the loan “could very well end up being a problem for the banks.” If Xerox defaults on the loan, it would not be too hard to manage by itself, but coming at the same time as other nonperforming loans, it could be tough for banks to handle, he said. “I think it’s in everyone’s best interest not to see this go into default.”

Adding to short-term concerns about the company’s liquidity is the fact that Xerox historically loses between $600 million and $1 billion in the first half of each year.

The $7 billion loan, should it turn nonperforming, could hit merging entities the hardest. J.P. Morgan and Chase, which expect their merger deal to close by the end of the quarter, combined could have a $750 million potential exposure. Chase declined to comment on its exposure.

BankAmerica Corp. had a $50 million exposure, while NationsBank Corp., which merged with BankAmerica in 1998 to form what is now Bank of America Corp., had $170 million.

Still, the Charlotte, N.C., company has recently admitted that its exposure to some troubled syndicated credits are higher than its exposure than Xerox’s loan.


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