AUSTIN, Texas--(BUSINESS WIRE)--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 plans to reattribute its e-commerce assets (valued at $1.5 billion by the company) and $1 billion in cash from the Liberty Interactive Tracking Stock (LINT) to the Liberty Ventures Tracking Stock (LVNT). Approximately 68 million new LVNTA/B shares will be issued as a dividend to LINT shareholders as consideration ($2.5 billion total value as of date of announcement). LINT will fund the $1 billion cash with borrowings on the QVC secured revolver due 2018. Liberty has applied to change the LINTA/B tracking stock symbol to QVCA/B. Following the reattribution, QVCA/B sole material assets will be QVC and the 38% interest in HSN, Inc. Plans to create a new Liberty Digital Commerce Tracking Stock have been cancelled.
Pro forma the incremental debt at QVC, Fitch calculates QVC's unadjusted gross leverage of 2.8x and Liberty's consolidated gross unadjusted leverage of 4.5x (excludes TripAdvisor's debt and EBITDA). While this exceeds Fitch's expected leverage levels for the ratings, Fitch expects EBITDA growth, and potential debt reduction from strong free cash flow (FCF) generation, to reduce leverage back to the company's target of 2.5x within 15-18 months. Fitch expects QVC to manage leverage to 2.5x over the longer term. Currently, there is reduced near-term financial flexibility for material debt-funded acquisitions and/or share repurchases. The reattributed cash will be used by Liberty Ventures for additional investments.
The IDRs for Liberty and QVC reflect the consolidated legal entity/obligor credit profile, rather than the LINT/LVNT tracking stock structure. Based on Fitch's interpretation of the Liberty LLC bond indentures, the company could not spin out QVC without consent of the bondholders, based on the current asset mix at Liberty LLC. QVC generates 81% and 97% of Liberty LLC's revenues and EBITDA, respectively. Any spinoff of QVC at this time would likely trigger the 'substantially all' asset disposition restriction within the Liberty LLC indentures.
The consolidated legal/obligor credit view may change over time if the 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.
Key Rating Drivers
The ratings reflect Liberty's August 2014 spin-off of Liberty TripAdvisor Holdings (LTRP), which holds a 22% equity/57% voting interest in TripAdvisor Inc. (TRIP) and the BuySeasons Inc. business. While Liberty consolidated TRIP into its financial statements, Fitch excluded TRIP from its financial analysis. While the loss of TRIP's value 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 ratings also incorporate Liberty's agreement to sell Provide Commerce Inc. to FTD Companies, Inc., and decision to reattribute the eCommerce companies to LVNT.
Fitch expects Liberty's FCF to be dedicated toward share repurchases and acquisitions. Fitch recognizes there is a risk of an acquisition of HSN Inc. However, depending on timing, how the transaction is structured, and the company's commitment to returning to leverage targets, ratings may remain unchanged.
The ratings reflect Fitch's expectation for Liberty's gross unadjusted leverage to be managed at around 4x and QVC unadjusted gross leverage to be managed at 2.5x.
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 reflect the solid operating performance at QVC with revenues and EBITDA for the latest 12 months (LTM) ending June 30, 2014 up 1.7% and 0.9%, respectively. During the same period, QVC Japan endured revenue declines of 17.1%, while QVC Germany has rebounded, with 3.7% growth. The geographic diversification of QVC provides the credit cushion to withstand cyclical declines in individual regions. 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 timeframe. 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 Liberty consolidated.
QVC's EBITDA margin fluctuation is driven in part by the product mix and will likely fluctuate over time as the product mix 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 see revenue growth with revenues up 6.1% in the LTM ending June 30, 2014. However, EBITDA continues to be pressured, down 40.4% due to ongoing pressures on the businesses. 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 3% 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 and its expansion into other markets. Acquisitions and share buybacks are expected to be a primary use of FCF.
Fitch also 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 collapsed.
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 vice versa, if ever needed.
Fitch believes Liberty continues to carry meaningful liquidity with $2.2 billion in cash (ex-TRIP, as of June 30, 2014 pro forma $1 billion draw on QVC revolver), $1 billion of availability on QVC's $2 billion revolver (expires March 2018, pro forma $1 billion draw), and $4.2 billion in other public holdings (ex-TRIP) as of June 30, 2014. Fitch calculates FCF of $1.2 billion (ex-TRIP) in the LTM period. Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $850 million for fiscal 2014.
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, with no credible plan to delever to leverage targets, 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:
--'Credit Encyclo-Media: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector (Volume VII, 2014-2015)' (Oct. 2, 2014);
--'Media and Entertainment Handbook (Fitch's Comprehensive Credit Profile Analysis of Issuers within the Media & Entertainment Sector)' (Oct. 2, 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Credit Encyclo-Media: Fitch's Comprehensive Analysis of the U.S. Media & Entertainment Sector (Volume VII, 2014-2015)
Media and Entertainment Handbook (Fitch's Comprehensive Credit Profile Analysis of Issuers within the Media & Entertainment Sector)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage