Fitch Affirms Liberty Interactive LLC's IDR at 'BB'; Outlook Stable
NEW YORK -- October 10, 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 provided at the end of this release.
Liberty announced its intentions to 1) spin-off its 22% equity/57% voting
interest in TripAdvisor Inc. (TRIP) and its BuySeasons Inc. business (Evite
will be separated from BuySeasons) and 2) separate the Liberty Interactive
tracking stock into two new tracking stocks, QVC and Liberty Digital Commerce.
TRIP and BuySeasons Inc. will be transferred to a new entity and the new
entity's equity will be distributed to the Liberty Venture tracking stock
holders. BuySeasons, which is currently attributable to Liberty Interactive,
will be reattributed to Liberty Ventures. In return Liberty Interactive will
receive cash compensation equal to the fair market value of BuySeasons. In
conjunction with the spin off, the new entity is expected to borrow $400
million, with $350 million distributed to Liberty and $50 million will remain
at the new entity for general corporate purposes.
While Liberty consolidated TRIP into its financial statements, Fitch excluded
TRIP from its financial analysis. While the loss of TRIP's value
(approximately $2 billion) is unfavorable to the credit profile, Fitch's
ratings materially rely on QVC, with Liberty's other investments, such as
TRIP, viewed as incremental support to the ratings.
The spin-off of BuySeasons will not have a material change to the credit
profile. The operations of BuySeasons was not a material contributor to the
Liberty consolidated profile.
Liberty intends to separate the Liberty Interactive tracking stock into two
new tracking stocks: Liberty Digital Commerce (LDCA/B), which will have the
e-commerce companies attributed to it, and QVC (QVCA/B), which will hold QVC
and the 38% HSN Inc. stake.
The Liberty debt attributed to Liberty Ventures is expected to remain
unchanged and the Liberty debt attributed to Liberty Interactive is expected
to be attributed to the QVC tracking stock.
As Fitch's ratings for Liberty and QVC reflect the consolidated legal
entity/obligor credit profile, rather than the tracking stock structure, the
separation of the Liberty Interactive tracking stock does not have a material
impact on the credit profile. 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 84% 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.
Liberty is exploring financing alternatives for LDC, including a potential
$250 million credit facility. The facility is expected to refinance existing
facilities across the e-commerce businesses. As Liberty would be the expected
issuer of the facility, the borrowing costs will be more favorable for the LDC
KEY RATING DRIVERS
The consolidated legal/obligor credit view (discussed above) may change over
time if the Liberty Ventures (LVNT) or LDC 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 intermediate term.
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 June 30, 2013, Fitch calculates QVC's unadjusted gross leverage at 2.1x
and Liberty's unadjusted gross leverage at 3.6x (excludes Trip Advisor's debt
and EBITDA). Liberty's unadjusted gross leverage is 3.8x pro forma the
September issuance of $400 million of 1% HSN, Inc. (HSN) exchangeable
debentures due 2043. Fitch expects that EBITDA growth would lead to reduced
leverage, and that Liberty will 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, the ratings may remain unchanged depending on how the
transaction is structured and on the company's commitment to returning QVC's
or Liberty's leverage to 2.5x and 4x, respectively.
The ratings reflect the solid operating performance at QVC with revenues and
EBITDA for the latest 12 months (LTM) ending June 30, 2013 up 1.2% and 3.3%,
respectively. During the same period, QVC Germany and Japan endured revenue
declines of 6.3% and 4.9%, respectively. The geographic diversification of QVC
provides the credit cushion to endure cyclical declines in the individual
regions. The ratings incorporate the cyclicality inherent in QVC's
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 12.3% in the LTM period ending June 30, 2013. However, EBITDA
continues to be pressured, down 9.6% 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 approximately 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 QVC will be sufficient to support operations its
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 the tracking stocks) to support
debt service and disciplined investment at LVNT. Fitch recognizes that in the
event of a liquidity strain at LVNT, QVC could provide funding to support debt
service (via intercompany loans), or the tracking stock structure could be
Fitch notes that cash can travel throughout all entities relatively easily.
Although the tracking stock structure adds a layer of complexity, Liberty has
in the past reattributed assets and liabilities. Fitch believes that resources
at QVC would be used to support LVNT and LDC, and vice versa, if ever needed.
Fitch believes Liberty continues to carry meaningful liquidity. Liberty
carried $1.2 billion in cash (ex-TRIP), $1 billion of availability on QVC $2
billion revolver (expires March 2018), and $3.6 billion in other public
holdings (ex-TRIP) as of June 30, 2013. Fitch calculates FCF of $714 million
in LTM period ending June 30, 2013. Based on Fitch's conservative projections,
Fitch expects Liberty's FCF to be in the range of $750 million to $950
Liberty's near-term maturities include $400 million of 1% HSN exchangeable
debentures that may be put to or redeemed by the company in 2016. QVC's next
maturity, other than its credit facility in 2018, is approximately $769
million in 7.5% senior secured notes due in 2019. Fitch believes Liberty has
sufficient liquidity to handle these maturities and potential 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 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'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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