NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to QVC Inc.'s (QVC) proposed 10.5- and 30-year note offerings. Proceeds are expected to be used to redeem the remaining $769 million principal amount of 7.5% senior secured notes due October 2019, which become callable in October 2014 at 103.75. 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. A full ratings list is provided at the end of this release.
The QVC notes' security package (including the proposed note offerings) 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 rating changes.
KEY RATING DRIVERS
The ratings incorporate Liberty's July 2014 agreement to sell Provide Commerce Inc., excluding RedEnvelope, to FTD Companies, Inc., and decision to delay separation of the Liberty Interactive tracking stock (LINTA) into Liberty Digital Commerce (LDCA/B), which would have included the e-commerce companies attributed to it, and QVC (QVCA/B), which would hold QVC and the 38% HSN, Inc. stake. The ratings also reflect the October 2013 announcement that Liberty intends to spin-off its 22% equity/57% voting interest in TripAdvisor Inc. (TRIP) and its BuySeasons Inc. business, which is expected to be completed by August/September 2014. Fitch does not expect a delay in the TRIP spin-off.
Fitch's ratings materially rely on QVC, with Liberty's other investments, such as TRIP, viewed as incremental support to the ratings.
Fitch's ratings for Liberty and QVC reflect the consolidated legal entity/obligor credit profile, rather than the 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 84% and 98% 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) 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 QVC unadjusted gross leverage at 2.5x.
As of June 30, 2014, Fitch calculates QVC's unadjusted gross leverage at 2.1x and Liberty's unadjusted gross leverage at 4.2x (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 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 leverage to 2.5x.
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 1.7% YoY in the LTM period ended June 2014), and maintain Fitch-calculated EBITDA margins in the 20% to 22% range over that same timeframe. Fitch believes that QVC will be able to continue to grow revenues at least at GDP levels going forward, and 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).
In Fitch's view, 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 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.
Liberty continues to carry meaningful liquidity: $1.2 billion in cash (ex-TRIP), $1.9 billion of availability on QVC's $2 billion revolver (expires March 2018), and $4.2 billion in other public holdings (ex-TRIP) as of June 30, 2014. Fitch calculates FCF of $951 million (ex-TRIP) in the LTM period ended June 30, 2014. Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $750 million to $1 billion.
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 $400 million aggregate principal of 3.125% senior secured notes due in 2019. Further, the 7.375% senior secured notes due 2020 become callable in April 2015 at 103.688%. Fitch believes Liberty has sufficient liquidity to handle these maturities and potential redemption. Other than the 2019 and 2020 notes, the remaining QVC notes' (including the new notes) call provisions are limited to make-whole provisions ranging from 25 bps-50 bps.
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' (May 28, 2014),
--'Liberty Interactive LLC/QVC Inc.' (Sept. 26, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Liberty Interactive LLC/QVC Inc.