NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Liberty Media LLC's (Liberty Media) and QVC Inc.'s (QVC) Issuer Default Rating (IDR) to 'BB' from 'BB-'. Fitch has also upgraded the issue ratings of Liberty Media LLC to 'BB' and affirmed the secured debt issue ratings of QVC at 'BBB-'. The Rating Outlook is Stable. A full rating list is shown below.
Rating and Upgrade Rationale:
Fitch's ratings reflect the expected
spin-off of the assets attributed to Liberty Capital (LCAP) and Liberty
Starz (LSTRZ); therefore, any assets attributed to LCAP and LSTRZ are
not factored into the ratings. In addition, any actions taken by LCAP or
LSTRZ that do not impact or change the assets attributed to Liberty
Interactive would have no effect on the ratings. This includes the
potential Barnes and Noble acquisition, which would be executed by LCAP.
The event risk that has previously plagued the ratings has subsided given the company's intention to spin-out LCAP and LSTRZ. Fitch believes that the asset mix will be relatively more stable going forward. While the risk remains that e-commerce assets and/or stakes in Expedia or Time Warner may be sold or spun-out, QVC generates 87% of revenues and 95% of EBITDA, providing the primary support for Liberty Media's debt service. Based on Fitch's interpretation of the indentures and the current asset mix at the post-spin Liberty Media, QVC could not be spun away from Liberty Media without consent of the bondholders.
Fitch's IDR ratings of QVC and Liberty Media reflect the consolidated credit profile of Liberty Media. 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 lease adjusted leverage metric for QVC standalone (2.6 times (x); using a net present value [NPV] method of lease and distribution obligations) are consistent with other similarly rated low investment grade retail names. Fitch recognizes that EBITDA margins (21.4%) and free cash flow (FCF) to both unadjusted and adjusted debt of 32.5% and 16%, respectively, are solid for the ratings.
When comparing to other media names covered by Fitch, the unadjusted leverage metrics at QVC and consolidated Liberty Media are solid for the current ratings. The ratings reflect the company's intentions to manage gross unadjusted leverage at Liberty Media in the 3.5x to 4x range. The ratings reflect Fitch's expectation that QVC standalone unadjusted leverage will be managed under 2.5x.
The ratings incorporate an expectation for continued acquisitions. Fitch recognizes that there is a risk of an acquisition of HSN Inc. However, Fitch believes an acquisition of HSN Inc. may be structured in a manner that would not impact current ratings.
Fitch believes liquidity at Liberty Interactive will be sufficient to support operations and QVC's expansion into other markets. Fitch expects acquisitions and share buybacks to be a primary use of FCF and expects share buyback activity to restart post the spin-off of LCAP and LSTRZ.
Key Rating Drivers:
--Ratings could be pressured if unadjusted
leverage for QVC exceeded 2.5x or Liberty Media's exceeded the company's
targeted thresholds. If QVC exceeded Fitch's targets and Liberty Media
was still within its threshold, QVC secured debt ratings could be
pressured.
--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.
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.
Revenues and EBITDA margins:
The ratings reflect the positive
growth QVC has achieved over the past year, with revenues up 6% in 2010
and 4% in the first quarter of 2011. Under Fitch's conservative base
case, revenues are expected to grow in the low- to mid-single digits and
EBITDA margins are expected to remain relatively consistent.
Liquidity:
Fitch calculates $1 billion of FCF at Liberty
Interactive in 2010. Fitch expects FCF to be in the range of $750
million to $1 billion in 2011.
As of March 31, 2011, liquidity for Liberty Interactive included $1.3 billion in cash and $1.2 billion available under the QVC credit facility, which expires in September 2015.
In addition, the company's balance sheet includes $2.3 billion in marketable, available-for-sale securities and investments in affiliates (includes the Time Warner basket of stocks and Expedia). If the market value of the Expedia shares were used, Fitch calculates the total value of these assets at $3.1 billion. Fitch believes these assets could be liquidated in the event that Liberty Media needed additional liquidity.
Liberty Interactive near-term maturities include $1.1 billion of exchangeable debentures that may be put to the company in 2013 and approximately $324 million in senior notes maturing in 2013. Fitch believes Liberty Media has sufficient liquidity (including the Time Warner basket of stocks) to handle these maturities.
Leverage:
Pro forma for the spin-off, Fitch estimates Liberty
Media's consolidated gross unadjusted leverage at 4x, net leverage at
3.4x, and net leverage including publicly held assets (primarily Expedia
and the basket of Time Warner shares) at 1.7x. Gross interest coverage
is estimated at 4.5x. QVC's gross unadjusted leverage (all debt at QVC
is secured) was 1.7x as of March 31, 2011, and would be unchanged pro
forma for the spin-off.
Fitch has taken the following rating actions:
Liberty
--IDR upgraded to 'BB' from 'BB-';
--Senior unsecured
debt upgraded to 'BB' from 'BB-'.
QVC
--IDR upgraded to 'BB' from 'BB-';
--Senior secured debt
affirmed at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria & Related Research:
--'Corporate Rating
Methodology' (Aug. 13, 2010).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.