(This is a correction for a release issued earlier today. It corrects the entity specified in the first sentence of the second to last paragraph.)
Fitch Ratings has taken the following rating actions on Liberty Media LLC (LLC) and its subsidiary, QVC, Inc. (QVC):
Liberty Media LLC:
--Issuer Default Rating (IDR) downgraded to 'BB-' from 'BB';
--Senior unsecured debt downgraded to 'BB-' from 'BB'.
QVC, Inc.:
--IDR affirmed at 'BB';
--Bank Facility affirmed at 'BBB-'.
All ratings are removed from Rating Watch Negative where they were placed on Sept. 3, 2008.
In addition, Fitch assigns a 'BBB-' rating to QVC's Term Loan B offering. The Rating Outlook is Negative.
While there is now a difference in IDRs between LLC and QVC, the difference is currently limited to one notch as 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 entities' 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 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. and reduction in non-core equity values, in addition to new features with the QVC bank facility (mandatory amortization, stricter Restricted Payments basket, etc), result in a weaker IDR at LLC relative to QVC. While LLC bondholders currently subordinate LLC management and equity holders from QVC, the indenture only restricts asset spins to 'all or substantially all' of the assets making future asset spins a continued risk for LLC bondholders.
QVC's 'BB' IDR reflects 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 results. QVC registered positive growth in the previous two economic downturns (early 90's and post 9/11) and until the 3rd quarter of 2008 never had a quarterly revenue decline. However, worldwide revenue for the last three quarters has decreased by 3%, 8% and 10%, respectively. The U.S. has been the weakest environment while Japan and Germany have actually registered strong positive growth in local currency. The U.K. is also weak but outpacing the U.S. Japan's economy has lagged the U.S. and U.K., so Fitch would expect to see some weakness in that region over the next few quarters. Fitch believes the weakness is predominantly due to the general cyclicality expected in such a weak economic environment and not due to secular changes of 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 'BBB-' rating on the QVC bank facility and Term Loan B take into account placement in the capital structure.
The downgrade of Liberty Media LLC's IDR to 'BB-' and Negative Outlook assignment take into account the weakened metrics after the expected split-off of Liberty Entertainment, Inc., mandatory amortization at QVC (which could result in greater pressure on LLC assets should QVC free cash not be sufficient to organically meet amortization payments) and overall event risk related to ultimate asset composition and capital structure. While LLC's unsecured debt has qualitative attributes that could be reflective of a 'B' category rating (namely, event risk of further asset spins and/or subordination), Fitch believes QVC's liquidity, asset coverage, and existing seniority to Liberty shareholders (of QVC) provide financial flexibility and incentive to support the servicing of financial commitments consistent with the current rating. 'B' category ratings exhibit more vulnerability to economic weakness, whereas Fitch believes Liberty management possesses the resources and incentive to meet its obligations while enduring a downturn.
Pro forma for the Entertainment split-off, net leverage through the senior unsecured debt at LLC (including equity stakes and LCAPA tax liabilities) should remain inside of 4.0 times (x), which is consistent with the current rating. Clearly further asset spins could change Fitch's view of the LLC securities. The new 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. Fitch does not believe this is material enough to differentiate bonds allocated to LCAPA with a notch versus bonds allocated to LINTA as the LCAPA bonds still have various other resources to service their issuances (which are generally low coupon and long-dated). Liberty's ratings continue to be supported by operating cash flows (predominantly through QVC) that cover total cash interest over 2.5x, with further bondholder protection through asset coverage (excluding operating businesses) of net debt and deferred tax liabilities of over 0.5x.
The consolidated entity's liquidity is strong and supported by approximately $3.7 billion in cash pro forma March 31, 2009 for the $750 million pay down of QVC bank debt and the early retirement on certain exchangeable notes. Additionally, liquidity is supported by net investment and financial securities of approximately $5.5 billion. While the QVC bank amendment extends the company's near-term maturity schedule, Liberty still has some significant maturities over the next five years. Including the mandatory amortization at QVC, approximate maturities will be $500 million in 2010, $700 million in 2011 (including non-consenting lenders), $400 million in 2012, $2.5 billion in 2013 (including $800 million of LLC's 5.7% senior notes and $1.3 billion of puttable Time Warner Exchangeable notes), and $2.5 billion in 2014 (before factoring in today's $500 million Term Loan B offering that would mature in 2015 and be used to reduce the 2014 bullet). Given QVC's operational issues, Liberty's portfolio of cash and marketable securities could become ever more important over the intermediate term to handle these maturities and offset loan reductions, tight credit markets, and higher interest expense. The mandatory amortization schedule forces management to focus on debt reduction. Between QVC cash flows and remaining assets at LLC, Fitch believes the company has the ability to meet this maturity schedule organically.
The rating actions take into account Fitch's expectations for the split-off of Liberty Entertainment, Inc. Depending on the specific circumstances, should the split-off not occur, it is likely the ratings would remain the same.
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