(The following statement was released by the rating agency)NEW YORK, October 10 (Fitch) Fitch Ratings has affirmed all the ratings of Liberty Interactive LLC (Liberty) and QVC, Inc. (QVC), including the companies' 'BB' Issuer Default Ratings (IDRs). A full rating list is provided at the end of this release.Liberty announced its intentions to 1) spin-off its 22% equity/57% voting interest in TripAdvisor Inc. (TRIP) and its BuySeasons Inc. business (Evite will be separated from BuySeasons) and 2) separate the Liberty Interactive tracking stock into two new tracking stocks, QVC and Liberty Digital Commerce. TRIP and BuySeasons Inc. will be transferred to a new entity and the new entity's equity will be distributed to the Liberty Venture tracking stock holders. BuySeasons, which is currently attributable to Liberty Interactive, will be reattributed to Liberty Ventures. In return Liberty Interactive will receive cash compensation equal to the fair market value of BuySeasons. In conjunction with the spin off, the new entity is expected to borrow $400 million, with $350 million distributed to Liberty and $50 million will remain at the new entity for general corporate purposes. While Liberty consolidated TRIP into its financial statements, Fitch excluded TRIP from its financial analysis. While the loss of TRIP's value (approximately $2 billion) is unfavorable to the credit profile, Fitch's ratings materially rely on QVC, with Liberty's other investments, such as TRIP, viewed as incremental support to the ratings. The spin-off of BuySeasons will not have a material change to the credit profile. The operations of BuySeasons was not a material contributor to the Liberty consolidated profile.Liberty intends to separate the Liberty Interactive tracking stock into two new tracking stocks: Liberty Digital Commerce (LDCA/B), which will have the e-commerce companies attributed to it, and QVC (QVCA/B), which will hold QVC and the 38% HSN Inc. stake. The Liberty debt attributed to Liberty Ventures is expected to remain unchanged and the Liberty debt attributed to Liberty Interactive is expected to be attributed to the QVC tracking stock. As Fitch's ratings for Liberty and QVC reflect the consolidated legal entity/obligor credit profile, rather than the tracking stock structure, the separation of the Liberty Interactive tracking stock does not have a material impact on the credit profile. Based on Fitch's interpretation of the Liberty bond indentures, the company could not spin out QVC without consent of the bondholders, based on the current asset mix at Liberty. QVC generates 84% and 96% of Liberty's revenues and EBITDA, respectively. In addition, Fitch believes QVC makes up a meaningful portion of Liberty's equity value. Any spin off of QVC would likely trigger the 'substantially all' asset disposition restriction within the Liberty indentures. Liberty is exploring financing alternatives for LDC, including a potential $250 million credit facility. The facility is expected to refinance existing facilities across the e-commerce businesses. As Liberty would be the expected issuer of the facility, the borrowing costs will be more favorable for the LDC group.KEY RATING DRIVERSThe consolidated legal/obligor credit view (discussed above) may change over time if the Liberty Ventures (LVNT) or LDC assets become a more meaningful portion of the consolidated Liberty asset mix/equity value. At that point, Fitch may adopt a more hybrid rating analysis, taking into consideration the attribution of assets and liabilities within each tracking stock. Fitch does not expect this to occur in the near or intermediate term. The ratings reflect Fitch's expectation that the company will continue to manage leverage on a Liberty consolidated basis. Fitch expects Liberty's gross unadjusted leverage to be managed at 4x and QVC unadjusted gross leverage to be managed at 2.5x. As of June 30, 2013, Fitch calculates QVC's unadjusted gross leverage at 2.1x and Liberty's unadjusted gross leverage at 3.6x (excludes Trip Advisor's debt and EBITDA). Liberty's unadjusted gross leverage is 3.8x pro forma the September issuance of $400 million of 1% HSN, Inc. (HSN) exchangeable debentures due 2043. Fitch expects that EBITDA growth would lead to reduced leverage, and that Liberty will manage leverage closer to its target levels over the long term. Currently, there is financial flexibility for debt funded acquisition and/or share repurchases.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. The ratings incorporate the risk of continued acquisitions at Liberty Interactive. Fitch recognizes that there is a risk of an acquisition of HSN Inc. However, the ratings may remain unchanged depending on how the transaction is structured and on the company's commitment to returning QVC's or Liberty's leverage to 2.5x and 4x, respectively. Operating PerformanceThe ratings reflect the solid operating performance at QVC with revenues and EBITDA for the latest 12 months (LTM) ending June 30, 2013 up 1.2% and 3.3%, respectively. During the same period, QVC Germany and Japan endured revenue declines of 6.3% and 4.9%, respectively. The geographic diversification of QVC provides the credit cushion to endure cyclical declines in the individual regions. The ratings incorporate the cyclicality inherent in QVC's business/retail industry.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 manage Fitch calculated EBITDA margins in the 20% to 22% range over that same time frame. Fitch believes that QVC will be able to continue to grow revenues at least at GDP levels going forward. Fitch models low to mid-single digit revenue growth at both QVC and at Liberty consolidated.QVC EBITDA margin fluctuation is driven in part by the product mix and will likely fluctuate over time as the product mixes changes. However, Fitch believes, over the next few years, QVC's EBITDA margins will remain in this historical 20% to 22% range. Liberty's e-commerce companies continue to have healthy revenue growth with revenues up 12.3% in the LTM period ending June 30, 2013. However, EBITDA continues to be pressured, down 9.6% due to increased promotional activity to move seasonal inventory and increased spending on advertising and marketing. While margins and EBITDA levels have been negatively affected, they remain positive and contribute positive cash flows to the consolidated credit. These businesses are relatively small in size, accounting for approximately 5% of consolidated Liberty EBITDA. Fitch does not ascribe a material weight to the e-commerce businesses when assessing the consolidated credit profile. Liquidity and MaturitiesFitch believes liquidity at QVC will be sufficient to support operations its expansion into other markets. Acquisitions and share buybacks are expected to be a primary use of free cash flow (FCF).Fitch 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 LVNT. Fitch recognizes that in the event of a liquidity strain at LVNT, 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 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 LVNT and LDC, and vice versa, if ever needed.Fitch believes Liberty continues to carry meaningful liquidity. Liberty carried $1.2 billion in cash (ex-TRIP), $1 billion of availability on QVC $2 billion revolver (expires March 2018), and $3.6 billion in other public holdings (ex-TRIP) as of June 30, 2013. Fitch calculates FCF of $714 million in LTM period ending June 30, 2013. Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $750 million to $950 million.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, other than its credit facility in 2018, is approximately $769 million in 7.5% senior secured notes due in 2019. Fitch believes Liberty has sufficient liquidity to handle these maturities and potential redempt
ion.RATING SENSITIVITIESPositive Rating Actions: 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. Negative Rating Actions: Conversely, changes to financial policy (including more aggressive leverage targets) and asset mix changes that weakened bondholder protection, could pressure the ratings. While unexpected, revenue declines in excess of 10% that materially drove declines in EBITDA and FCF and resulted in QVC leverage exceeding 2.5x would likely pressure ratings. Fitch has affirmed the following ratings:Liberty--IDR at 'BB';--Senior unsecured debt at 'BB'. QVC--IDR at 'BB';--Senior secured debt at 'BBB-'. The Rating Outlook is Stable.Contact:Primary AnalystRolando LarrondoDirector+1-212-908-9189Fitch Ratings, Inc.One State Street PlazaNew York, NY 10004 Secondary AnalystDave PetersonSenior Director+1-312-368-3177Committee ChairpersonMichael WeaverManaging Director+1-312-368-3186Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.Additional information is available at 'www.fitchratings.com'. Applicable Criteria & Related Research: --'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkagehttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Additional Disclosure Solicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804640 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
