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Fitch Affirms Liberty Interactive and QVC's IDRs at 'BB'; Outlook Stable
November 10, 2017 / 4:13 PM / 12 days ago

Fitch Affirms Liberty Interactive and QVC's IDRs at 'BB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, November 10 (Fitch) Fitch Ratings has affirmed the 'BB' Long-Term Issuer Default Rating (IDR) for Liberty Interactive LLC, (Liberty) and QVC Inc. (QVC). The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. As of Sept. 30, 2017, Liberty had approximately $8.2 billion of debt outstanding, including approximately $5.4 billion at QVC. KEY RATING DRIVERS Consolidated Profile Drives Ratings: The ratings for Liberty and its wholly owned subsidiary QVC reflect the consolidated legal entity/obligor credit profile. Based on Fitch's interpretation of Liberty's indentures, the company could not spin out QVC without bondholder consent as a spinoff would trigger the "substantially all" asset disposition restriction in the Liberty indentures. Liberty is a wholly owned subsidiary of Liberty Interactive Corporation (LIC). GCI Acquisition: On April 4, 2017, LIC announced the $2.7 billion all-stock acquisition of General Communication, Inc. (GCI) and subsequent tax-free spinoff of GCI Liberty, Inc. (GCI Liberty), an entity created following the contribution of certain assets and liabilities of Liberty Ventures Group (Liberty Ventures), a wholly owned subsidiary of Liberty, to GCI (collectively, the GCI transactions). Prior to its contribution to GCI, Liberty Ventures will reattribute certain assets and liabilities to Liberty, which will then be renamed QVC Group, Inc. Liberty Ventures' reattribution to Liberty will include $750 million of 1.75% Charter Exchangeable Debentures due 2046 (Charter Debentures) and approximately $590 million of additional cash, an amount equal to the net present value of the Charter Debentures and accrued interest payments through Oct. 2, 2023. In addition, GCI Liberty will provide an indemnification for any payments made by Liberty to meet any excess adjusted principal and interest payments, with the total amount paid partially offset by tax benefits accruing from the early extinguishment of the Charter Debentures. GCI Liberty will also provide Liberty with a negative pledge, thereby requiring GCI Liberty to maintain an amount of underlying Charter shares equal to any outstanding Charter Debentures. Within six months of the transactions closing, Liberty will offer to purchase the Charter Debentures on terms and conditions reasonably acceptable to GCI Liberty. GCI Liberty will indemnify Liberty for each Charter Debenture repurchased in any amount in excess of the $590 million of cash stated above plus any tax benefit retained by Liberty from the retirement of such debentures at a premium. Fitch believes the GCI transactions are neutral to the ratings. They represent a credit positive to QVC, given leverage improvements from the reattributions, and a credit negative to Liberty, as the transfer of assets to GCI Liberty reduces asset coverage for Liberty's unsecured debt. HSN Acquisition: On July 6, 2017, LIC announced the $2.6 billion acquisition of the 61.8% interest of HSN, Inc. (HSN), to be held by LIC, that Liberty does not already own in an all-stock transaction. Fitch believes the acquisition is neutral to both Liberty's and QVC's ratings, as it reduces Liberty's gross leverage and improves unsecured debt coverage. Fitch has always relied materially on QVC and viewed Liberty's other assets as providing incremental support for the rating. Fitch believes the acquisition is a credit positive for Liberty given HSN's full consolidation and decline in Liberty's gross leverage and will initially be credit neutral to QVC as any operational benefits, including $75 million to $110 million of expected cost synergies, are not expected to be fully realized for three to five years. Ratings Reflect M&A Activity: The ratings incorporate the GCI transactions and the acquisition of the HSN shares it does not already own. Pro forma for these transactions and assuming QVC repays debt with the full $329 million of cash included as part of Liberty Ventures' reattribution to Liberty, Fitch estimates QVC's gross leverage at 2.6x and Liberty's gross leverage at 3.6x as of Sept. 30, 2017. Fitch continues to expect QVC will reduce total leverage to its 2.5x target within the next six to nine months. QVC Debt Ratings: 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 QVC's stand-alone ratings would be. Recent Operating Weakness: Fitch recognizes QVC's ability to manage product mix and adapt to its customers' shopping preferences. However, QVC has been experiencing ongoing top-line weakness across several product categories including jewelry and electronics. Fitch will continue to pay close attention to QVC's operating performance over the next few quarters to determine the breadth, depth and tenor of this weakness. Cash Deployment: Fitch expects Liberty's FCF to be dedicated to share repurchases and debt reduction. Fitch expects QVC to manage to its stated 2.5x leverage target within six to nine months primarily through debt repayment, which is expected to include approximately $329 million of cash to be reattributed to QVC as part of the GCI Transactions, and EBITDA growth. DERIVATION SUMMARY Liberty/QVC is well positioned within the retail sector given its loyal customer base, with 93% of FY16 sales generated by repeat and reactivated customers, and an increasing global ecommerce presence, which generated $4 billion of FY16 net revenues. It offers a wide variety of consumer products, marketed and sold primarily by merchandise-focused televised shopping programs distributed to more than 360 million households daily, the Internet and mobile applications. The HSN acquisition will further solidify the company's position as the largest provider of television retailing and a leading multimedia retailer. Nordstrom, Inc. (BBB+/Stable), Kohl's Corporation (BBB/Negative), Macy's Inc. (BBB/Negative) and Dillard's (BBB-/Stable) are rated higher than Liberty/QVC due primarily to lower leverage while all but Dillard's have larger revenue bases. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --HSN acquisition closes in 4Q17, includes the assumption of $529 million of debt. Low to mid-single digit revenue growth and high single digit margins projected over the rating horizon; --QVC revenues return to slight positive growth in 4Q, with low to mid-single digit growth thereafter, while zulily sees high single digit growth annually; --Consolidated margins fall approximately 200 b.p. with the inclusion of HSN given its lower margins. Thereafter they grow annually due to revenue growth and the realization of the $75 to $100 million of expense reductions over the rating horizon; --FCF generation of between $880 million to $1.2 billion annually; --FCF and debt issuance fund debt repayment and $800 million of share buybacks; --During 2018, QVC's total leverage decline below 2.5x and remains roughly in that area due to debt issuance. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Fitch believes if Liberty were to manage to more conservative leverage targets, ratings could be upgraded. --Liberty would need to demonstrate sustained gross unadjusted leverage below 3.5x and QVC's unadjusted gross leverage reduced to below 2x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Negative action could occur if QVC does not return leverage to 2.5x within six to nine months. --If financial policy changes, including more aggressive leverage targets and asset mix changes weakening bondholder protection. --If there are 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. LIQUIDITY Liquidity is adequate: Fitch believes QVC's liquidity will be sufficient to support operations and its expansion into other markets. Fitch expects near-term debt repayment, acquisitions and share buybacks to be a primary use of FCF. Fitch calculates FCF of approximately $1.4 billion for the last 12 months ended June 30, 2017. Fitch expects FCF to be in the $1.2 billion to $1.3 billion range in 2017. Fitch recognizes that in the event of a liquidity strain at Liberty, QVC could provide funding to support debt service (via intercompany loans), or the tracking stock structure could be collapsed. Liberty's consolidated liquidity as of June 30, 2017 included $905 million in readily available cash, $941 million available under QVC's $2.65 billion revolving credit facility (RCF), the majority of which expires in June 2021 (see below), and $2.3 billion in available-for-sale investments. Liberty has $1.2 billion of near-term maturities that are only classified as near-term because Liberty does not own the underlying shares needed to redeem the debentures. However, Liberty has no intention or requirement to redeem them in the near term, and their maturities range from 2029 to 2031. QVC's actual maturities are manageable, with $400 million of 3.125% senior secured notes due in 2019, a $140 million revolving credit facility (RCF) tranche maturing in 2020, and the remaining $2.5 billion RCF tranche maturing in 2021. FULL LIST OF RATING ACTIONS Fitch affirms the following ratings: Liberty Interactive LLC --IDR at 'BB'; --Senior unsecured at 'BB/RR4'. QVC --IDR at 'BB'. --Senior secured debt at 'BBB-/RR1'. The Rating Outlook is Stable. Contact: Primary Analyst Jack Kranefuss Senior Director +1-212-908-0791 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Patrice Cucinello Director +1-212-908-0866 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Summary of Financial Statement Adjustments --No material adjustments have been made that have not been disclosed in public filings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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