Debt

9 Months Ended

Sep. 30, 2020

Senior Notes

On August 6, 2020, Xerox Holdings issued $550 of 5.000% Senior Notes due August 2025 (the "2025 Senior Notes") at par and $550 of 5.500% Senior Notes due August 2028 (the "2028 Senior Notes") at par resulting in aggregate net proceeds (after fees and expenses) of approximately $1,089. On August 24, 2020, Xerox Holdings issued an additional $200 of the 2025 Senior Notes at 100.75% of par and an additional $200 of the 2028 Senior Notes at 102.50% of par resulting in additional aggregate net proceeds (after premium, fees and expenses) of approximately $405 for total aggregate net proceeds from both issuances of approximately $1,494.

The Notes are fully and unconditionally guaranteed by Xerox Corporation. In addition, the notes and the related guarantees were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and have not been registered for sale under the Securities Act or any state securities laws. Interest on the 2025 and 2028 Senior Notes is payable semi-annually.

Debt issuance costs of approximately $13 were paid and deferred in connection with the issuance of the 2025 and 2028 Senior Notes and will be amortized over the term of the Senior Notes. The net debt proceeds were contributed by Xerox Holdings to Xerox Corporation and used to repay $362 aggregate principal amount of 3.500% senior notes of Xerox Corporation and $376 aggregate principal amount of 2.750% senior notes of Xerox Corporation, which were both due in third quarter 2020. Xerox Corporation also used the balance of the net proceeds to prepay a portion of the 4.500% senior notes due 2021 in October 2020 (Refer to Note 18 – Shareholder's Equity of Xerox for additional information regarding the contribution and Note 22 - Subsequent Event for additional information regarding this prepayment).

Credit Facility

On July 31, 2020, Xerox and Xerox Holdings entered into Amendment No. 3 to the Credit Facility, which modified the financial covenants to require that, during a specified covenant modification period (which begins on the effective date of the Amendment and ends on the earlier of (1) December 31, 2021 and (2) the date on which Xerox delivers a written notice to the Administrative Agent electing to end such period (the “Financial Covenant Modification Period”), Xerox must maintain unrestricted cash (as defined in the Amendment) in an amount not less than $1.0 billion. Further, the Amendment relaxed the financial maintenance leverage covenant in the Credit Agreement by requiring that, during the Financial Covenant Modification Period, Xerox maintain a ratio of net debt

for borrowed money to consolidated EBITDA of not greater than 4.25:1.00 (with a cap on cash netting of $1.75 billion), in lieu of the 4.25:1.00 total debt for borrowed money to consolidated EBITDA ratio requirement applicable prior to the Amendment.

Secured Borrowings and Collateral

In July 2020, we entered into a secured loan agreement with a financial institution where we sold $355 of U.S. based finance receivables and the rights to payments under operating leases with an equipment net book value of $10 to a special purpose entity (SPE). The purchase by the SPE was funded through an amortizing secured loan to the SPE from the financial institution of $340. The sale of the receivables to the SPE was structured as a "true sale at law," and we have received an opinion to that effect from outside legal counsel. However, the transaction was accounted for as a secured borrowing as we consolidate the SPE since we have both the power to direct the activities that most significantly impact the SPE's economic performance through our role as servicer of all the receivables held by the SPE, and the obligation through variable interests in the SPE to absorb losses or receive benefits that could potentially be significant to the SPE. As a result, the assets of the SPE are not available to satisfy any of our other obligations. Conversely, the credit holder of this SPE does not have legal recourse to the Company’s general credit.

The debt has a variable interest rate based on LIBOR plus a spread (current rate of 1.73% at September 30, 2020) and an expected life of less than three years with half projected to be repaid within the first year based on collections of the underlying portfolio of receivables. We also entered into an interest rate hedge agreement to cap LIBOR over the life of the loan. The proceeds from this debt funded the cash used in May 2020 to repay the $313 aggregate principal amount of 2.80% Senior Notes due 2020 of Xerox Corporation.

Below are the assets and liabilities held by the consolidated SPE, which are included in our Condensed Consolidated Balance Sheet:


	September 30, 2020
Assets held by SPE
Finance receivables, net	$	132
Finance receivables due after one year, net	182
Equipment on operating leases, net	9
Total Assets	$	323
Liabilities held by SPE
Current portion of long-term debt, net(1)	$	158
Long term debt, net(2)	157
Total Liabilities	$	315

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(1)Amounts net of unamortized debt issuance costs of $1.

(2)Amounts net of unamortized debt issuance costs of $1.

Interest Expense and Income

Interest expense and income were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest expense(1)	$	59	$	60	$	158	$	179
Interest income(2)	56		62		182		193

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(1)Includes Cost of financing as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

(2)Includes Financing revenue as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.