Fitch Affirms Liberty Interactive LLC's IDR at 'BB'; Outlook Stable
NEW YORK -- February 20, 2013
Fitch Ratings has affirmed all the ratings of Liberty Interactive LLC
(Liberty) and QVC Inc. (QVC), including the companies' 'BB' Issuer Default
Ratings (IDRs). A full rating list is shown below.
Fitch's IDRs for Liberty and QVC reflect the consolidated legal entity/obligor
credit profile, rather than the Liberty Interactive/Venture tracking stock
structure. Based on Fitch's interpretation of the Liberty bond indentures, the
company could not spin out QVC without consent of the bondholders, based on
the current asset mix at Liberty. QVC generates 85% and 96% of Liberty's
revenues and EBITDA, respectively. In addition, Fitch believes QVC makes up a
meaningful portion of Liberty's equity value. Any spin off of QVC would likely
trigger the 'substantially all' asset disposition restriction within the
The consolidated legal/obligor credit view may change over time if the Liberty
Ventures assets become a more meaningful portion of the consolidated Liberty
asset mix/equity value. At that point, Fitch may adopt a more hybrid rating
analysis, taking into consideration the attribution of assets and liabilities
within each tracking stock. Fitch does not expect this to occur in the near or
The ratings reflect Fitch's expectation that the company will continue to
manage leverage on a Liberty consolidated basis. Fitch expects Liberty's gross
unadjusted leverage to be managed at 4 times (x) and QVC unadjusted gross
leverage to be managed at 2.5x.
As of Sept. 30, 2012, Fitch calculates QVC's unadjusted gross leverage at 1.9x
and Liberty's unadjusted gross leverage at 3.9x. Pro forma for the redemption
(scheduled for March 8, 2013) of the $414 million in 3.25% exchangeable
debentures due in 2031 (exchangeable for Viacom and CBS shares), Liberty's
unadjusted gross leverage is 3.7x. While Fitch expects EBITDA growth would
lead to reduced leverage, Fitch expects Liberty to manage leverage closer to
its target levels over the long term. Currently, there is financial
flexibility for debt funded acquisition and/or share repurchases.
Fitch rates both QVC's senior secured bank credit facility and the senior
secured notes 'BBB-' (two notches higher than QVC's IDR). The secured issue
ratings reflects what Fitch believes would be QVC's standalone ratings. Fitch
expects that the ratings would remain unchanged in the event that the
remaining security is released.
The ratings incorporate the risk of continued acquisitions at Liberty
Interactive. Fitch recognizes that there is a risk of an acquisition of HSN
Inc. However, depending on how the transaction is structured, and the
company's commitment to returning QVC's or Liberty's leverage to 2.5x and 4x,
respectively, ratings may remain unchanged.
The ratings reflect the solid operating performance at QVC with total
September 2012 year to date revenues and EBITDA up 3.6% and 6.2% respectively.
As of this time frame, QVC Germany was the only region to endure revenue
declines, down 11.8% (down 3.6% on a local currency basis). The geographic
diversification of QVC provides the credit cushion to endure cyclical declines
in the German region. The ratings incorporate the cyclicality inherent in
QVC's business / retail industry.
Fitch recognizes QVC's ability to manage product mix and adapt to its
customers shopping preferences. QVC has managed to grow revenues over the last
three years and manage Fitch calculated EBITDA margins in the 20% to 22% range
over that same time frame. Fitch believes that QVC will be able to continue to
grow revenues at least at GDP levels going forward. Fitch models low to
mid-single digit revenue growth at both QVC and at Liberty consolidated.
QVC EBITDA margin fluctuation is driven in part by the product mix and will
likely fluctuate over time as the product mixes changes. However, Fitch
believes, over the next few years, QVC's EBITDA margins will remain in this
historical 20% to 22% range.
Liberty's e-commerce companies continue to have healthy revenue growth with
14.5% growth in the YTD period. However, EBITDA has been significantly
pressured, down 17.6% due to increased promotional activity to move seasonal
inventory and increased spending on advertising and marketing. While margins
and EBITDA levels have been negatively affected, they remain positive and
contribute positive cash flows to the consolidated credit. These businesses
are relatively small in size, accounting for 6% of consolidated Liberty
EBITDA. Fitch does not ascribe a material weight to the e-commerce businesses
when assessing the consolidated credit profile.
Liquidity and Maturities
Fitch believes liquidity at Liberty Interactive will be sufficient to support
operations and QVC's expansion into other markets. Acquisitions and share
buybacks are expected to be a primary use of free cash flow (FCF).
Fitch believes that there is sufficient liquidity and cash generation (from
investment dividends and tax sharing between Liberty Interactive and Liberty
Ventures) to support debt service and disciplined investment at Liberty
Venture. Fitch recognizes that in the event of a liquidity strain at Liberty
Ventures, Liberty Interactive could provide funding to support debt service to
Liberty Ventures (via intercompany loans), or the tracking stock structure
could be collapsed.
Fitch notes that cash can travel throughout all entities relatively easily
(although the tracking stock structure adds a layer of complexity, Liberty LLC
has in the past reattributed assets and liabilities). Fitch believes that
resources at QVC would be used to support Liberty LLC, and vice versa, if ever
As of Sept. 30, 2012, liquidity for Liberty included $1.8 billion in cash and
$1.1 billion available under the QVC credit facility, which expires in
September 2015. Fitch calculates FCF of $979 million for the last 12 months
ended Sept. 30, 2012. Based on Fitch's conservative projections, Fitch expects
Liberty's FCF to be in the range of $750 million to $900 million.
In addition, Fitch calculates $5.5 billion in public holdings. Fitch believes
these assets could be liquidated in the event that Liberty needed additional
Liberty's near-term maturities include $1.1 billion of exchangeable debentures
that may be put to the company in 2013 and approximately $279 million in
senior notes maturing in 2013. As noted above, the company intends to redeem
its 3.25% exchangeable debentures in March 2013. Fitch believes Liberty has
sufficient liquidity (including the Time Warner basket of stocks) to handle
these maturities and redemption.
The QVC facility and notes benefit from a security interest in the capital
stock of QVC and are guaranteed by QVC's material and domestic subsidiaries.
The secured collateral may be removed as QVC's leverage has been below 2x for
two consecutive fiscal quarters, as permitted under the company's credit
agreement. The collateral package would be reinstated for both the banks and
the senior notes in the event that last 12 months leverage exceeded 3x for two
Positive Rating Actions: Fitch believes that the current financial policy is
consistent with the current ratings. If the company were to manage to more
conservative leverage targets, ratings may be upgraded.
Negative Rating Actions: Conversely, changes to financial policy (including
more aggressive leverage targets) and asset mix changes that weakened
bondholder protection, could pressure the ratings. While unexpected, revenue
declines in excess of 10% that materially drove declines in EBITDA and FCF and
resulted in QVC leverage exceeding 2.5x would likely pressure ratings.
Fitch has affirmed the following ratings:
--IDR at 'BB';
--Senior unsecured debt at 'BB'.
--IDR at 'BB';
--Senior secured debt at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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Rolando Larrondo, +1-212-908-9189
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Shawn Gannon, +1-212-908-1223
Michael Simonton, CFA, +1-312-368-3138
Brian Bertsch, New York, +1 212-908-0549
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