Fitch Rates QVC's Proposed Senior Secured Offering 'BBB-'
NEW YORK -- March 11, 2014
Fitch Ratings has assigned a 'BBB-' rating to QVC Inc.'s (QVC) proposed 5- and
10-year note offering. Proceeds are expected to be used to reduce borrowings
drawn on QVC's revolver ($922 million outstanding at Dec. 31, 2013). Any
excess proceeds are expected to be used for general corporate purposes,
including working capital. Fitch views the transaction as neutral to the
credit profile as it is expected to be materially leverage neutral. For
additional information regarding Liberty and QVC, please see Fitch's credit
report published on Sept. 26, 2013. A full ratings list is provided at the end
of this release.
The QVC notes' security package (including the proposed note offering) mirrors
the credit facility's security package. Both sets of instruments are pari
passu with each other and benefit from a security interest in the capital
stock of QVC and are guaranteed by QVC's material domestic subsidiaries.
Under the credit agreement, priority debt (debt senior to the credit
agreements and the notes) is limited to 50% of QVC EBITDA (an approximately
$900 million limit). All other additional debt (either pari passu or
subordinated to QVC's existing debt) is primarily limited by the 3.5x
financial leverage covenant.
Under the secured indentures (including the proposed note offering),
additional indebtedness is limited by a 2x interest coverage incurrence test,
with standard carve outs. In addition, debt secured by QVC/QVC subsidiary
assets is limited to $4.5 billion/$5 billion (currently there is no debt
issued under this basket). Fitch notes that under the indenture documents, if
QVC were to pledge the equity of its subsidiaries to secure debt in the
future, the notes (and the credit facility under the bank agreement) would
receive the security as well. Fitch does not expect this to happen.
In addition to the debt limitations discussed above, the provisions of these
notes include a 101% change of control offer that is triggered if 1) more than
30% of the voting power is acquired by a person other than a Permitted Holder
(as defined), 2) such voting power exceeds the voting power of the Permitted
Holders, and 3) QVC's secured notes are rated non-investment grade. As with
the QVC secured indentures, in the event that the notes are rated investment
grade (as defined), the limitations on debt, restricted payments and other
provisions would fall away and would not be reinstated, regardless of any
KEY RATING DRIVERS
The ratings reflect the October 2013 announcement that Liberty intends 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:
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. While Liberty consolidated TRIP into its financial statements, Fitch
excluded TRIP from its financial analysis. While the loss of TRIP's value
(approximately $2.6 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 cause a material change to the credit profile. The operations of
BuySeasons was not a material contributor to the Liberty consolidated profile.
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
95% 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 (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 Dec. 31, 2013, Fitch calculates QVC's unadjusted gross leverage at 2x
and Liberty's unadjusted gross leverage at 3.8x (excludes Trip Advisor's debt
and EBITDA). 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
rating reflects what Fitch believes would be QVC's standalone rating.
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.
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 (up 1.3% in 2013) 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 change.
However, Fitch believes, over the next few years, QVC's EBITDA margins will
remain in this historical 20% to 22% range.
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 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 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
Fitch believes Liberty continues to carry meaningful liquidity. Liberty
carried $905 million in cash (ex-TRIP), $1.1 billion of availability on QVC's
$2 billion revolver (expires March 2018), and $4.2 billion in other public
holdings (ex-TRIP) as of Dec. 31, 2013. Fitch calculates FCF of $714 million
(ex-TRIP) in FYE 2013. Based on Fitch's conservative projections, Fitch
expects Liberty's FCF to be in the range of $750 million to $900 million.
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, which becomes callable by
QVC at 103.75 on Oct. 1, 2014. 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 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'.
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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Rolando Larrondo, +1-212-908-9189
Fitch Ratings, Inc.
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David Peterson, +1-312-368-3177
Michael Weaver, +1-312-368-3186
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