DBRS Confirms Liberty Media Corporation at BBB (low)

Dominion Bond Rating Service (DBRS) has today confirmed the rating of Liberty Media Corporation’s (Liberty or the Company) Senior Debt at BBB (low). The trend remains Stable.

Liberty’s rating remains underpinned by the strong cash flow generated by its 99% owned QVC, Inc. (QVC) subsidiary along with its investment portfolio that gives approximately two times coverage to total outstanding debt. QVC continues to generate double-digit cash flow growth as it increases the number of units sold via its electronic retailing format, while average price per sale continues to rise. Liberty’s investment portfolio and large cash balances also generate substantial cash flow for the Company; thus, Liberty generates well over $700 million in free cash flow, which helps justify an investment-grade rating despite $10.4 billion in outstanding principal debt.

DBRS notes that the recent conversion of Liberty’s stock into two tracking stocks, Liberty Interactive and Liberty Media, had no rating implications as the debt still remains at the holding company level despite the Company assigning debt amounts to the two new groups. Currently, there has been much speculation around Liberty’s investment portfolio strategy, as the Company has indicated it wishes to move from “passive” interest into positions where the Company has more “active” influence. The most topical issue concerns the possibility of Liberty exchanging its $9.9 billion position in News Corporation for News Corporation’s 37% stake in DirecTV. DBRS’s initial reaction to such a transaction would likely be neutral, as long as Liberty did not increase debt as a consequence of a follow-up transaction (e.g., increase its stake in DirecTV even further). DBRS does acknowledge that if Liberty can gain more control over investments and their resultant cash flows, the potential for ratings improvement could occur, unless QVC were to be significantly impacted by the expected slowing of consumer spending.

Liberty’s debtholders could also become concerned with the performance of both new tracking stocks if they fail to increase in value towards management’s expectations. If so, DBRS believes there could be potential for a leveraged buyout by Liberty’s management. Barring any transactions, DBRS notes that free cash flow will likely be used for further share repurchases with debt levels being maintained at current levels. Liberty recently refinanced $1.4 billion of maturing debt using its QVC bank facilities. Although the amount of debt at QVC has risen to $2.6 billion and structurally ranks ahead of the Liberty debt, DBRS believes that this is offset by the maintenance of a liquid investment portfolio along with strong liquidity.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.