TEXT - Fitch affirms Liberty Interactive LLC
Feb 20 - 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 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 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 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. Operating Performance 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 needed. 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 liquidity. 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. QVC Security 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 consecutive quarters. Rating Sensitivities 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: Liberty --IDR at 'BB'; --Senior unsecured debt at 'BB'. QVC --IDR at 'BB'; --Senior secured debt at 'BBB-'. The Rating Outlook is Stable.