Fitch Rates Liberty Interactive's Proposed Senior Debenture Offering 'BB'
NEW YORK -- April 2, 2013
Fitch Ratings has assigned a 'BB' rating to Liberty Interactive LLC's
(Liberty) $550 million proposed exchangeable senior unsecured debenture due
2043. The notes are exchangeable for a basket of Time Warner Inc. and Time
Warner Cable Inc. common stock (Reference Shares).
Proceeds are expected to be used to retire the $1.1 billion of 3.125%
exchangeable senior unsecured debentures due 2023, which became redeemable by
the company in April 2013. Liberty intends to use existing liquidity to fund
the remaining balance of the 3.125% debenture redemption. The new debentures
will rank pari passu with Liberty's existing notes and debentures ($3.8
billion as of Dec. 31, 2012) and will be structurally subordinated to QVC
Inc.'s (QVC) debt ($3.4 billion as of Dec. 31, 2012). QVC's debt benefits from
a pledge of the capital stock of QVC and is guaranteed by QVC's material
Fitch views the transactions favorably for the credit profile as the
transactions modestly reduce leverage, extend maturities and is expected to
reduce interest expense. A full rating list is shown below.
For additional information regarding Liberty and QVC, please see Fitch's
credit report published on March 4, 2013.
The new debentures may be redeemed by Liberty after April 2018 if the market
price of the Reference Shares equals or exceeds a defined level. The
debentures will be redeemable by Liberty at any time, regardless of market
price of the Reference Shares, after April 2023. The debentures may be put to
Liberty in March 2023 and Liberty may satisfy such redemption either with
cash, delivering the applicable number of reference shares, or both.
Any dividends or distributions made by the Reference Share companies will be
distributed to the debenture holders as an additional distribution, except for
common equity, which would become Reference Shares. Fitch notes that upon the
completion of Time Warner Inc's spinoff of Time Inc., Time Inc. would become a
reference company and its shares would become Reference Shares.
The principal amount of the debentures will not be reduced by any additional
distributions related to regular cash dividends. However, the debenture's
principal amount would be reduced by any additional distributions made related
to extraordinary distributions on or related to the Reference Shares. Interest
payments on the debentures will be calculated based on the original principal
amount (regardless of any adjustments related to extraordinary distributions).
Subsequent to such an extraordinary distribution, the principal amount will be
further reduced on interest payment dates to the extent necessary so that the
annualized yield on the debenture does not exceed the stated coupon rate. An
extraordinary distribution includes any cash or asset consideration (other
than common equity) that is distributed by a Reference Share company in
connection with a merger, consolidation, share exchange, liquidation or
dissolution involving a reference company.
Similar to Liberty's existing debentures, there is no material covenant
protection for debenture holders; however, there are lien restrictions. Liens
are not permitted under the debentures, unless a pari passu lien is granted.
Standard carveouts exist; there is also a general lien basket that limits
liens to 15% of the total consolidated asset value of Liberty and its
KEY RATING DRIVERS
Fitch's Issuer Default Ratings (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 Liberty indentures.
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 4x and QVC unadjusted gross leverage to
be managed at 2.5x.
As of Dec. 31, 2012, Fitch calculates QVC's unadjusted gross leverage at 1.9x
and Liberty's unadjusted gross leverage at 3.9x. Pro forma for the March 2013
redemption of the $414 million in 3.25% exchangeable debentures (which were
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.
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 2012 revenues
and EBITDA up 3% and 5.5% respectively. In 2012, QVC Germany was the only
region to endure revenue declines, down 10.5% (down 3.5% 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
revenues up 11.4% in 2012. However, EBITDA has been significantly pressured,
down 22% 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 5% 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 Dec. 31, 2012, liquidity for Liberty included $2.3 billion in cash and
$1.1 billion available under the QVC credit facility, which expires in March
2018. Fitch calculates FCF of $1.1 billion in 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 approximately $241 million in senior
notes maturing in 2013. Liberty's next maturity would be in 2029. QVC's next
maturity is approximately $769 million in 7.5% senior secured notes due in
2019 (pro forma for the March 2013 dutch auction and the planned redemption of
the 7.125% senior secured notes in April 2013). Fitch believes Liberty has
sufficient liquidity to handle these maturities and redemption.
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 currently rates Liberty and QVC as follows:
--Senior unsecured debt 'BB'.
--Senior secured debt '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);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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Rolando Larrondo, +1-212-908-9189
Fitch Ratings, Inc.
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Shawn Gannon, 1-212-908-1223
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