Fitch Ratings has assigned a 'BBB-' rating to QVC, Inc.'s (QVC) $500 million senior secured note offering due 2019. Proceeds will be used to reduce borrowings under the company's bank facility. The notes will be secured and guaranteed on a pari passu basis with the company's approximately $4 billion of outstanding secured bank debt pro forma for this transaction. Fitch currently rates QVC and its parent, Liberty Media LLC (LLC), as follows:
QVC, Inc.:
--Issuer Default Rating (IDR) 'BB';
--Senior Secured 'BBB-'.
Liberty Media LLC:
--IDR 'BB-';
--Senior unsecured debt 'BB-'.
The Outlook is Negative for all ratings. Note that all ratings take into account Fitch's expectations for the split-off of Liberty Entertainment, Inc.
The 'BBB-' rating on the secured note offering takes into account placement in the capital structure. The notes are expected to receive guarantees from all of QVC's material domestic subsidiaries as well as security in certain personal and intellectual property. The security package does not include real property, likely as a result of the limitation on liens covenant in LLC bonds. The secured collateral can be removed if QVC's leverage falls for two consecutive fiscal quarters below 2 times (x) as defined in the company's credit agreement. Fitch would expect the debt of a sub-2x leveraged QVC to remain investment grade.
In addition, subsidiaries guaranteeing the notes (restricted subsidiaries) can be designated as unrestricted if the company is in compliance with its consolidated leverage test which starts at 3.9x and steps down to 3.5x by March 2011 and beyond. This provision is weaker than the bank facility, as leverage step-downs for designation of unrestricted subsidiaries reach 3x in that document; however, Fitch does not believe this warrants a difference in ratings. The rights for noteholders toward the security and guarantee packages are generally tied to the credit facilities. The existing facilities mature 2014; however, the senior notes' security is intended to remain tied to any re-financings/replacements of the existing facilities and therefore the notes should remain secured through 2019 (notwithstanding leverage under 2x or an unsecured bank facility, in which instance Fitch would expect to see an improved capital structure for QVC).
QVC's ratings reflect its individual business profile and credit metrics that would likely warrant an IDR greater than 'BB' on a stand-alone basis; however, it also takes into account the reliance on QVC to service a large portion of the debt at LLC. In addition to general event risk, the Negative Outlook reflects the weak global economic environment and its impact on QVC's businesses. Fitch estimates QVC's gross leverage at approximately 3.2x for the last 12 months (LTM) ended June 30, 2009. Interest coverage should remain above 4x pro forma for all recent refinancings. Including the company's commission payments to cable providers, Fitch estimates QVC's fixed charge coverage ratio to be just over 3x.
QVC registered positive growth in the previous two economic downturns (early 1990s and post 9/11) and until the third quarter of 2008 never had a quarterly revenue decline. However, worldwide revenue for the LTM ended June 30, 2009 is down approximately 7%. QVC's U.S. and U.K. operations have performed the weakest, while Germany has been relatively resilient over the last year. QVC Japan is just now registering negative growth (-3% on a constant currency basis), as the Japanese economy has generally lagged the U.S. Fitch expects to see additional weakness in that region over the next few quarters. Importantly, the most recent quarter ended June 30, 2009 registered improvement in sequential yearly trends for the U.S., U.K. and German operations. Total global revenue was down 4% for the most recent quarter versus double-digit declines over the prior two quarters. For the most recent quarter, U.S revenue was down 2% versus declines of 9%-12% over the prior three quarters. U.K. constant-currency revenue was up 1% (versus mid-single-digit declines) while German constant-currency revenue was up 7%. The improvement is generally the result of improving trends in average spend per customer. Despite these improving trends, Fitch is still cautious regarding a near-term return to consistent material growth.
Fitch believes the softness of QVC's operations over the last 12-18 months is predominantly due to the general cyclicality expected in such a weak economic environment and not due to secular changes in the business. In order to manage through the downturn, the company has reduced its employee base by 900 and continues to manage down its inventory levels. The company has also benefited from lower delivery costs and improved overall efficiencies with its distribution infrastructure. As a result, declines in EBITDA have generally trended with the declines in revenue over the last few periods.
While Fitch differentiates the IDRs of QVC and LLC, the difference is currently limited to one notch, because Fitch believes default risk will remain relatively correlated as cash can still travel throughout all entities relatively easily. Historically, Fitch equalized the IDRs of the two issuing entities based on the belief that resources at QVC would be used to support LLC if ever needed and vice versa. Fitch believed that the strength and resources of QVC and LLC (excluding QVC) were generally similar, and the residual value at each entity would justify using the other entity's resources if ever needed, as equity holders would be unlikely to risk losing specific assets to lenders if it could be avoided by using other group member's resources. Fitch still believes this to be the case, albeit to a lesser degree relative to historical periods. The reduction in asset value at LLC via the expected split-off of Liberty Entertainment, Inc., as well as QVC bank facility features (mandatory amortization, stricter restricted payments basket, etc.), result in a weaker IDR for LLC relative to QVC.
The consolidated LLC's liquidity is strong and supported by approximately $3.9 billion in cash at June 30, 2009 and over $6 billion in gross marketable securities. Fitch estimates QVC cash to be approximately $750 million for the same period. There is no availability under the QVC revolver. QVC's maturity schedule is material and includes $500 million in 2010, $700 million in 2011, $400 million in 2012, $400 million in 2013, and $2.5 billion in 2014 (before factoring in today's $500 million secured note offering). Between QVC cash flows and remaining assets at LLC, Fitch believes the company has the ability to meet this maturity schedule organically. The restricted payments basket at QVC has no restrictions on dividends specifically for principal and interest of debt allocated to Liberty Interactive (LINTA). Otherwise, dividends are restricted if QVC leverage is greater than 3.5x with step-downs to 3.0x over the next few years.
For additional information, please see Fitch's report on Liberty Media LLC and QVC, Inc., dated July 31, 2009 and available on the Fitch web site at 'www.fitchratings.com'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.
Contacts:
Fitch Ratings
Jamie Rizzo, CFA, 212-908-0548, New York
Mike
Simonton, CFA, 312-368-3138, Chicago
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
