Xerox's High-Yield Gamble: The $100 Million Note Issuance and Lexmark's Uncertain Future

Xerox Corporation’s recent $100 million issuance of Senior Secured Second Lien Notes due 2031, disclosed in an SEC filing on May 6, 2025, underscores the company’s aggressive pursuit of debt financing to complete its proposed acquisition of Lexmark International II, LLC. With an eye-watering 13.5% annual interest rate—a stark reflection of perceived risk—the move signals both desperation and ambition. But as regulatory hurdles loom and financial stability hangs in the balance, investors must weigh the allure of high yields against the precarious path ahead.

The Notes’ Structure: A High-Risk, High-Reward Proposition

The May 6 offering supplements a $400 million April 2025 issuance of identical notes, bringing the total raised under this tranche to $500 million. These notes, issued at 95% of par (a 5% discount), carry a 13.5% coupon—a rate 300 basis points above the 10.25% offered on Xerox’s concurrent first-lien notes. This spread highlights the market’s skepticism about Xerox’s ability to manage its swelling debt load, which now totals $900 million in new borrowings since March 2025.

Crucially, the notes are tied to the Lexmark acquisition’s success. Proceeds remain escrowed until the deal closes, with a hard deadline of December 22, 2025 (extendable only with investor consent). If the acquisition fails, the notes must be redeemed at par plus accrued interest—a costly penalty that could force Xerox into a liquidity crunch.

The Lexmark Acquisition: A Necessary, Yet Risky, Lifeline

The Lexmark deal, first announced in December 2024, is framed as a strategic move to bolster Xerox’s position in the shrinking print industry. However, Lexmark’s own financials raise doubts: its Q1 2025 revenue of $511 million and net income of just $2 million suggest weak profitability, even before integration costs. Regulatory approvals remain uncertain, with antitrust scrutiny a potential roadblock.

Xerox’s own financial health is precarious. Despite the $900 million in new debt, its revenue has been declining for years, and the print sector’s shift to digital solutions continues to erode demand. The company’s reliance on the Lexmark deal to stabilize its cash flows is clear—but what if it falters?

Legal and Financial Crosscurrents Complicate the Picture

The SEC filing also reveals a simmering dispute with the Thompson Commitment Party, which oversees a separate $225 million senior unsecured note offering. Thompson’s May 2 notice of intent to terminate its obligations—disputed by Xerox—adds another layer of uncertainty. Should this commitment unravel, Xerox could face a $225 million funding shortfall, further straining its balance sheet.

Meanwhile, the company’s total indebtedness post-acquisition will balloon, with combined interest expenses alone projected to consume a significant portion of its cash flow. The 13.5% notes, while attractive to yield-seeking investors, amplify refinancing risks as maturity approaches in 2031.

Conclusion: A High-Yield Roll of the Dice

Xerox’s May 2025 note issuance is a bold bet on the Lexmark acquisition’s success, but the stakes are sky-high. With $900 million in new debt, a 13.5% coupon rate, and a redemption trigger tied to the acquisition’s completion, investors are essentially betting on two outcomes:
1. Deal Success: If the Lexmark acquisition closes by December 2025, Xerox gains scale and operational synergies. The $500 million in escrowed funds would fund the purchase and debt repayment, alleviating immediate liquidity concerns.
2. Deal Failure: If the acquisition collapses, Xerox must repay $500 million in notes plus accrued interest—a $550 million+ obligation that could force asset sales or equity dilution.

The numbers tell the tale: Xerox’s Q1 2025 revenue of $511 million (Lexmark’s contribution) is dwarfed by its $900 million debt pile, and its trailing 12-month EBITDA (if reported) must comfortably cover interest payments to avoid distress. With global print demand projected to decline at a 3–5% annual rate through 2030, the company’s path to profitability hinges entirely on Lexmark’s integration success—a gamble that could pay off handsomely for risk-tolerant investors, or end in a costly default.

For now, the 13.5% yield is a siren song, but the rocky shores of regulatory risk, integration challenges, and industry decline lie in wait. Investors should proceed with eyes wide open.