NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' Issuer Default Ratings (IDRs) for Liberty Interactive LLC (Liberty LLC) and its wholly owned subsidiary QVC Inc. (QVC) following today's announcement by Liberty Interactive Corporation (Liberty), Liberty LLC's parent, that it intends to spin-off two newly created companies, CommerceHub, Inc. and Liberty Expedia Holdings, Inc. (Expedia Holdings) from the Liberty Ventures Group (Ventures Group) tracking stock. The Rating Outlook remains Stable.
CommerceHub, Inc. will be comprised of the CommerceHub business. Expedia Holdings will house Liberty's 18% ownership interest in Expedia, Inc. along with Liberty's subsidiary, Bodybuilding.com LLC.
Ventures Group shareholders will receive corresponding shares of CommerceHub and Expedia Holdings for every Ventures Group share held. Following the transaction, Ventures Group will consist of Liberty's digital commerce assets, various public equity holdings, and other assets and liabilities.
Overall, Fitch views the spin-offs as leverage neutral given the minimal EBITDA contribution of those assets. Proforma for the spin-offs and new borrowings at QVC related to the zulily acquisition that closed Oct. 1, 2015, Fitch calculates QVC Inc.'s gross leverage at 2.8x and Liberty LLC's gross leverage at 4.5x as of Sept. 30, 2015.
KEY RATING DRIVERS
The ratings for Liberty LLC and QVC reflect the consolidated legal entity/obligor credit profile, rather than the Interactive/Ventures 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 in view of the current asset mix at Liberty LLC. QVC generates 85% 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.
Fitch expects Liberty LLC's gross unadjusted leverage to be managed to 4.0x and QVC's unadjusted gross leverage to be managed 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 and has managed Fitch-calculated EBITDA margins in the 20% - 22% range over that time frame. Fitch believes QVC will be able to continue to grow revenues at least at in line with GDP growth. QVC's EBITDA margin fluctuation is driven in part by the product mix. Fitch believes over the next few years, QVC's EBITDA margin will remain in its historical 20% - 22% range.
Fitch expects Liberty LLC's free cash flow (FCF) to be dedicated toward share repurchases and debt reduction following this transaction. While QVC will deleverage over time through EBITDA growth, Fitch expects QVC to manage leverage closer to its stated leverage targets of 2.5x within 24 months following the zulily acquisition. Fitch recognizes the risk remains that Liberty LLC acquires the 62% of HSN Inc. it does not already own, but believes the probability of this has been reduced with the zulily acquisition.
Positive Rating Actions: Fitch believes that if Liberty LLC were to manage to more conservative leverage targets, ratings could be upgraded.
Negative Rating Actions: If QVC is unable to return leverage to below the 2.5x rating threshold within 24 months, Fitch would review the rating. In addition, changes to financial policy, including more aggressive leverage targets, and asset mix changes that weaken bondholder protection could pressure the ratings. And finally, while unexpected, revenue declines in excess of 10% that materially drive declines in EBITDA and FCF and result in QVC's leverage exceeding 2.5x in the absence of a credible plan to reduce leverage back under 2.5x would likely pressure ratings.
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 Liberty LLC. Fitch recognizes that in the event of a liquidity strain at Liberty LLC, 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 Liberty 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 Liberty, and vice versa, if ever needed.
Fitch believes Liberty LLC continues to carry meaningful liquidity with $2.5 billion in readily available cash, $0.4 billion of availability on QVC's $2.25 billion revolver due March 2020 (pro forma acquisition), and $2.7 billion in other public holdings as of Sept. 30, 2015 proforma for the spin-off. Fitch calculates FCF of $1.4 billion for the last 12 months ended Sept. 30, 2015 (excluding discontinued operations). Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $800 - $900 million for fiscal 2015.
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 is $400 million aggregate principal of 3.125% senior secured notes due in 2019. Fitch believes Liberty has sufficient liquidity to handle these maturities and potential redemption. Other than the 2019 and 2020 notes, the remaining QVC notes' call provisions are limited to make-whole provisions ranging from 25 bps-50 bps.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Liberty Interactive LLC
--Issuer Default Rating (IDR) at 'BB';
--Senior unsecured at 'BB/RR4'
--IDR at 'BB'
--Senior secured debt at 'BBB-/RR1'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: November 12, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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