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Rating Action:

Moody's lowers Liberty Media's bonds to B3; affirms B1 CFR and QVC's Ba2 note ratings; outlook stable

22 Sep 2011

Approximately $4.2 billion of debt instruments affected

New York, September 22, 2011 -- Moody's Investors Service downgraded Liberty Media LLC's (Liberty Media) senior unsecured bond ratings to B3 from B1 and its Probability of Default Rating (PDR) to B1 from Ba3 following the Delaware Supreme Court's affirmation of the Delaware Chancery Court's ruling that the proposed split-offs of the assets underlying the Liberty Capital (LCAPA) and Liberty Starz (LSTARZ) tracking stock groups do not violate the "substantially all" asset conveyance clause in Liberty Media's bond indenture. The rating action concludes the review for possible downgrade initiated on June 21, 2010. Liberty Media expects to complete the split-offs on September 23, 2011. The split-offs remove a meaningful amount of assets (approximately 18% of revenue and 37% of enterprise value) from Liberty Media with a minimal change to consolidated debt. The transactions disproportionately and negatively affect Liberty Media's bondholders as they held the most senior debt claim on the LCAPA and LSTARZ assets. This asset support helped mitigate the structural subordination of Liberty Media's bondholders to QVC Inc.'s (QVC) debt with respect to QVC's assets and cash flow. As a result of the split-offs, the structural subordination to QVC's debt becomes a more prominent factor in Liberty Media's bond ratings and drives the downgrade to B3.

Moody's affirmed Liberty Media's B1 Corporate Family Rating (CFR) as event risks such as the LCAPA/LSTARZ split-offs were factored into the CFR and the expected mid/high 4x-to-low 5x debt-to-EBITDA leverage range is consistent with the rating. Liberty Media's speculative-grade liquidity rating remains at SGL-1 indicating the company will continue to have a very good liquidity position following the split-offs, which provides dry powder for Liberty Media to pursue opportunistic transactions including share repurchases. Moody's also affirmed QVC's Ba2 senior bond ratings as the split-offs are a distribution of assets by its parent that Moody's did not view as the primary source of support for QVC's debt. Moody's is withdrawing QVC's stand alone Ba2 CFR and Ba3 PDR as the split-offs eliminate the need for separate CFRs with the consolidated credit profile now being evaluated within Liberty Media's CFR. Moody's viewed separate CFRs as more appropriate when the asset pools supporting Liberty Media's bondholders and QVC's debt holders were meaningfully different. Because the non-QVC asset pool is now much smaller, Moody's no longer believes separate CFRs are necessary. Moody's also updated the loss given default assessments based on the current debt mix. The rating outlook is stable.

Downgrades:

..Issuer: Liberty Media LLC

....Probability of Default Rating, Downgraded to B1 from Ba3

....Senior Unsecured Conv./Exch. Bond/Debentures, Downgraded to B3, LGD5 - 78% from B1, LGD4 - 67%

....Senior Unsecured Regular Bond/Debentures, Downgraded to B3, LGD5 - 78% from B1, LGD4 - 67%

Loss Given Default Updates:

..Issuer: QVC, Inc.

....Senior Secured Regular Bond/Debentures, Changed to LGD2 - 23% from LGD3 - 38% (no change to Ba2 rating)

Outlook Actions:

..Issuer: Liberty Media LLC

....Outlook, Changed To Stable From Rating Under Review

Withdrawals:

..Issuer: QVC, Inc.

.... Corporate Family Rating, Withdrawn, previously rated Ba2

.... Probability of Default Rating, Withdrawn, previously rated Ba3

RATING RATIONALE

Liberty Media's B1 CFR reflects the good operating margins and cash flow generated from its portfolio of operating assets led by QVC, its high leverage, and risk that its assets will be utilized in a manner that benefits shareholders more than bondholders. Event risks related to asset distributions are lower but only because a sizable portion of the assets (Liberty Global, Liberty Starz, Liberty Capital and Liberty's significant stakes in Discovery Communications and DirecTV) have already been spun off to shareholders. However, Liberty Media is opportunistic and this creates uncertainty relating to the evolution of the asset portfolio and leverage profile. The B1 CFR is based on Moody's expectation that Liberty Media's debt-to-EBITDA leverage will be centered on a mid/high 4x-to-low 5x range over the next 12-18 months as it executes its investment and operating strategies.

Liberty Media's debt-to-EBITDA leverage (approximately 4.2x LTM 6/30/11 pro forma for the LCAPA/LSTARZ split-offs and incorporating Moody's standard adjustments) is increasingly modestly from 3.9x as a result of the split-offs and is at the low end of the range anticipated in the rating, strongly positioning the company within the B1 CFR. However, Moody's expects that QVC's debt-to-EBITDA leverage (approximately 1.6x LTM 6/30/11 based on the company's definition that excludes Moody's standard adjustments) will increase to the 2.0x -- 2.5x range targeted by Liberty Media. This equates to a high 4x/low 5x debt-to-EBITDA ratio for consolidated Liberty Media when factoring in Liberty Media's $4.2 billion of outstanding bonds, the operating assets outside of QVC, and Moody's other adjustments including the approximate $1 billion deferred tax liability related to Liberty Media's bonds that Moody's includes in debt.

Liberty Media's SGL-1 speculative-grade liquidity rating reflects its very good liquidity position with a sizable cash balance (approximately $1.3 billion as of 6/30/11 pro forma for the split-offs), no near term maturities of bonds or QVC debt, and good cushion under the financial maintenance covenants in QVC's credit facility. QVC has approximately $1.3 billion of unused capacity on its $2 billion revolving credit facility that matures in 2015. The facility does not contain a general MAC borrowing clause and is secured only by the stock of QVC. QVC has an EBITDA cushion exceeding 50% within its 3.5x maximum debt-to-EBITDA covenant. Moody's estimates the EBITDA cushion would decline to a still meaningful high 20% range if QVC increased its leverage to the high end of the aforementioned 2.0x -- 2.5x target range (on this same basis, the cushion would exceed 20% once the covenant steps down to 3.25x in September 2012).

The largest remaining non-operating assets after the LCAPA/LSTARZ split-offs are the investments in Expedia (26% stake with a market value of approximately $1.9 billion), Time Warner/Time Warner Cable/AOL (approximately $900 million), and HSN (34% for approximately $700 million including the 1.5 million share forward purchase announced 9/21/11). Moody's anticipates Liberty Media will seek to tax efficiently exit the investments in Expedia and Time Warner/Time Warner Cable/AOL, but the HSN stake is more strategic and could be an avenue to a merger between HSN-QVC if the parties can agree upon an appropriate valuation. Moody's estimates a debt-funded acquisition of HSN would increase Liberty Media's leverage by approximately 0.3x even assuming a modest premium to HSN's current valuation. Moody's believes such a transaction could be accommodated within Liberty Media's B1 CFR.

The stable rating outlook reflects Moody's expectation that Liberty Media will more actively pursue opportunistic transactions including share repurchases now that the overhang from the split-offs (including the indenture litigation) has passed, and that Liberty Media's debt-to-EBITDA leverage will increase to a mid/high 4x-to-low 5x range over the next 12-18 months. Moody's expects Liberty Media will continue to maintain a solid liquidity position and that any economic disruptions to QVC's business can be accomodated within the leverage range anticipated for the rating.

The downgrade of Liberty Media's PDR to B1 reflects a reversion of its mean family recovery rate assumption to 50% that is standard for companies with multiple layers of debt. This is prompted by Moody's decision to move to a single CFR for Liberty Media-QVC. Moody's has withdrawn QVC's CFR and PDR for its own business reasons. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its Web site, www.Moodys.com.

The ratings could be downgraded if liquidity weakens, the asset composition or risk profile meaningfully changes, QVC's operating performance deteriorates meaningfully, or debt-to-EBITDA is sustained above 6.25x.

Liberty Media's ratings could be upgraded if debt-to-EBITDA is sustained in a low 4x range or lower factoring in potential opportunistic transactions, that revenue and operating performance is stable or growing, and liquidity remains healthy. A change in the mix of Liberty Media bonds and QVC debt could result in changes to the debt instrument ratings even if the B1 CFR does not change.

Please see the credit opinion posted to www.Moodys.com for additional information on the ratings for Liberty Media and QVC.

Please see ratings tab on the issuer/entity pages for Liberty Media and QVC on www.Moodys.com for the last Credit Rating Action and the rating history.

The principal methodology used in rating Liberty Media was Moody's Global Retail Industry Methodology, published in June 2011. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Liberty, headquartered in Englewood, Colorado, is a holding company that owns and operates a broad range of electronic retailing, communications, and entertainment businesses and also owns equity and debt positions in wide variety of technology, media and telecommunications companies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Liberty Media's bonds to B3; affirms B1 CFR and QVC's Ba2 note ratings; outlook stable
No Related Data.
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