Business Context and Reporting Period
This Form 8-K, dated December 7, 2016, reports on Conduent Incorporated's entry into material definitive agreements in connection with its spin-off from Xerox Corporation. The filing details the establishment of new debt facilities and the issuance of senior notes to fund the separation, purchase international subsidiaries, and pay a distribution to Xerox.
Key Financial Metrics and Debt Structure
The filing outlines the creation of significant debt obligations totaling approximately $2.21 billion in aggregate principal capacity, consisting of the following:
- Senior Secured Term Loan A: Up to $700 million with a five-year maturity. Approximately $278 million was borrowed in Euros on December 8, 2016.
- Senior Secured Term Loan B: $750 million with a seven-year maturity, fully borrowed on the closing date.
- Senior Secured Revolving Credit Facility: $750 million with a five-year maturity, including up to $300 million available for letters of credit.
- Senior Unsecured Notes: $510 million aggregate principal amount of 10.500% notes due December 15, 2024.
Interest rates for the Term Loan A and Revolving Facility vary based on leverage ratios, with initial margins of 1.25% (base rate) or 2.25% (eurocurrency). Term Loan B carries a fixed margin of 4.50% (base rate) or 5.50% (eurocurrency). The Notes bear interest at 10.500% per annum.
Material Changes and Covenants
The primary material change is the assumption of substantial new debt to facilitate the corporate spin-off. Key financial covenants and repayment terms include:
- Leverage Ratio: XBS must maintain a total net leverage ratio not exceeding 4.25 to 1.00 until the fiscal quarter ending September 30, 2018, and 3.75 to 1.00 thereafter.
- Amortization: Term Loan A requires principal payments of 7.5% in years 2 and 3, 10.0% in year 4, and 15.0% in year 5. Term Loan B requires 1.0% annual principal payments.
- Prepayment: A "soft call" prepayment penalty of 1% applies to Term Loan B if voluntarily refinanced within 12 months of the closing date.
- Redemption: The Notes are redeemable at a "make-whole" premium prior to December 15, 2020, and at specified prices thereafter. Up to 35% may be redeemed prior to December 15, 2019, using equity offering proceeds at 110.500% of principal.
Outlook, Risks, and Contingencies
Management intends to use the net proceeds from the Term Loan Facilities to purchase international subsidiaries from Xerox, pay a distribution to Xerox, and fund working capital. Proceeds from the Notes will fund a portion of the cash transfer to Xerox.
Contingencies: If the Spin-Off is not completed by March 31, 2017, or if Xerox determines not to pursue the Spin-Off, the Issuers are required to redeem the Notes in whole at 100% of the issue price plus accrued interest.
Risks: Failure to comply with covenants, including the leverage ratio, could result in the immediate acceleration of all outstanding amounts under the Senior Credit Facilities. The Notes are unsecured and senior obligations, guaranteed by the Company and certain subsidiaries.
Investor Verification Checklist
- Verify the exact amount of the distribution paid to Xerox and the specific cash proceeds used for the purchase of international subsidiaries.
- Confirm the pro forma leverage ratio of XBS immediately following the Spin-Off to ensure compliance with the 4.25 to 1.00 covenant.
- Review the full text of the Credit Agreement (Exhibit 10.1) and Indenture (Exhibit 4.1) for specific definitions of "excess cash flow" and asset sale proceeds required for mandatory prepayments.
- Monitor the status of the Spin-Off completion relative to the March 31, 2017, deadline to assess the risk of mandatory Note redemption.