OREANDA-NEWS. Fitch Ratings has assigned a 'BB/RR4 (EXP)' rating to Liberty Interactive LLC's (Liberty) proposed exchangeable senior unsecured debentures. Proceeds from the offering are expected to be used primarily for debt repayment and general corporate purposes. As of June 30, 2016, Liberty had approximately $8.3 billion of debt outstanding. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Consolidated Profile Drives Ratings: Liberty's and QVC Inc.'s (QVC) ratings reflect the consolidated legal entity/obligor credit profile, rather than the tracking stock structure of Interactive (QVCA/B)/Ventures (LVNTA/B). Based on Fitch's interpretation of Liberty's indentures, Liberty could not spin out QVC without bondholder consent. Fitch believes because QVC generates 84% and 96% of Liberty's revenues and EBITDA, respectively, a spinoff would trigger the "substantially all" asset disposition restriction in the Liberty indentures.

Ratings Reflect Spinoff: Fitch's ratings materially rely on QVC, with Liberty's other investments viewed as incremental support. The ratings incorporate LVNTA/B's July 2016 spinoff of CommerceHub, Inc. and its expected spinoff of Liberty Expedia Holdings, Inc.

Recent Investment: Liberty used cash on hand to invest $2.4 billion in Liberty Broadband Corporation (Broadband) for a 24% ownership position in Broadband in May 2016, leaving Liberty with $492 million of cash at June 30, 2016. Broadband used the proceeds to fund its $5 billion stock purchase for 25% ownership in an entity (New Charter) created by Charter Communications Inc.'s merger with Time Warner Cable Inc. and acquisition of Bright House Networks. Liberty also exchanged its TWC ownership for a 2% ownership position in New Charter.

Zulily Acquisition: Liberty acquired zulily Inc. in October 2015 for $2.3 billion using cash on hand at zulily (approximately $300 million), the issuance of approximately 38.5 million shares of QVCA stock ($1.2 billion) and borrowings under QVC's revolving credit facility ($800 million).

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 Issuer Default Rating. The secured issue rating reflects what Fitch believes QVC's stand-alone ratings would be.

Diversification and Adaptability: Fitch recognizes QVC's ability to manage product mix and adapt to its customers' shopping preferences. QVC grew revenues over the last three years while maintaining Fitch-calculated EBITDA margins in the 20%-22% range. Fitch believes QVC will continue to grow revenues at least at GDP levels. While QVC EBITDA margin fluctuation is driven in part by product mix, Fitch believes these margins will remain in their historical 20%-22% range over the next few years.

Cash Deployment: Fitch expects Liberty's FCF to be dedicated to share repurchases and debt reduction, and QVC to manage to its stated 2.5x leverage target within 18 months, primarily though EBITDA growth. Fitch recognizes the risk remains that Liberty may acquire the 62% of HSN Inc. it does not own, but believes the zulily acquisition reduced this probability.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Liberty Interactive LLC include:

-- Annual revenue growth in low single digits;

-- EBITDA margins remain in the 19%-20% range;

-- Annual FCF generation of approximately $0.9 billion-$1 billion;

-- Share buybacks funded by FCF.

RATING SENSITIVITIES

Positive Rating Actions: Fitch believes if Liberty were to manage to more conservative leverage targets, ratings could be upgraded. Fitch expects Liberty's gross unadjusted leverage to be managed to 4.0x and QVC's unadjusted gross leverage to be managed to 2.5x.

Negative Rating Actions: Negative action could occur if QVC does not return leverage to below 2.5x within 18 months; if financial policy changes, including more aggressive leverage targets and asset mix changes, weaken bondholder protection; or 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

Fitch believes liquidity at QVC will be sufficient to support operations and its expansion into other markets. Acquisitions and share buybacks are expected to be a primary use of FCF.

Fitch also 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 Liberty LLC. Fitch recognizes that in the event of a liquidity strain at Liberty LLC, 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 Liberty 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 Liberty, and vice versa, if ever needed.

Fitch believes Liberty LLC continues to carry meaningful liquidity with $492 million in readily available cash, $975 million of availability on QVC's $2.65 billion revolver due June 2021 ($140 million matures on March 2020), and $3 billion in other public holdings as of June 30, 2016 (pro forma for the spinoffs of Expedia and CommerceHub). Fitch calculates FCF of $874 million for the last 12 months ended June 30, 2016 (excluding discontinued operations). Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $900 million-$1 billion for fiscal 2016.

Liberty's maturities are well laddered and include a $450 million margin loan due in 2017 and $400 million of QVC's 3.125% senior secured notes due in 2019. Fitch believes Liberty has sufficient liquidity to handle these maturities and other potential redemptions. Other than the 2019 and 2020 notes, the remaining QVC notes' call provisions are limited to make-whole provisions ranging from 25 bps-50 bps.

FULL LIST OF RATING ACTIONS

Fitch currently has the following ratings:

Liberty Interactive LLC

--Issuer Default Rating (IDR) at 'BB';

--Senior unsecured at 'BB/RR4'.

QVC

--IDR at 'BB'.

--Senior secured debt at 'BBB-/RR1'.

The Rating Outlook is Stable.