Fitch Affirms Liberty Media's IDR At 'BB'; Revises Outlook to Stable

Business Wire, Dec 21, 2007

NEW YORK -- Fitch Ratings has affirmed the following ratings for Liberty Media LLC (Liberty) and its subsidiary QVC Inc. (QVC):

Liberty Media LLC

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

--Senior unsecured debt at 'BB';

QVC Inc.

--IDR at 'BB';

--Bank Facility at 'BBB-';

The Rating Outlook has been revised to Stable from Negative.

The ratings continue to be supported by operating businesses (predominantly QVC) which cover cash interest at approximately 3 times (x). Despite some challenges over the last few quarters (price of gold in the U.S., Japan regulation, and weak demand in Germany), Fitch expects QVC to continue to produce margins substantially greater than its retail peers and strong free cash flow conversion. Bondholder protection is further supported by strong asset coverage metrics. The company's existing portfolio of public and private assets (worth approximately $40 billion at Sept. 30, 2007) cover net debt over 4x and cover net debt and deferred tax liabilities over 2x. These public equity holdings are generally liquid despite non-binding ties to exchangeable debt, equity derivatives, and strategic plans. Collars have traditionally provided some stability in asset value however Fitch does not expect Liberty to collar its eventual DirecTV holdings.

Rating concerns include the potential for significant deals and shareholder friendly transactions (asset swaps, spin-offs, and consolidations, etc.). Fitch also recognizes that there are limited covenants that could protect bondholders from the company spinning-off other assets (Indenture has all or substantially all language) similar to the Discovery spin-off in 2005. Also, QVC's recent slowed growth causes some concern from an operating perspective, as does the potential for shareholder-friendly activities to offset this slower growth as QVC and the Liberty Interactive (LINTA) tracking stock were intended to isolate the faster growing assets of Liberty. While there continues to be some uncertainty related to the company's ultimate portfolio composition, we recognize that management has made progress on its stated plans of simplifying the capital structure and transitioning towards operating businesses rather than passive equity stakes (assuming the News Corp./DirecTV swap is completed).

The revision of the outlook to stable reflects Fitch's belief that given the strong asset coverage, the 'BB' rating category captures many event risk scenarios including some potential structural subordination concerns.

Fitch expects Liberty to use up its remaining net operating carryover losses through 2007 and therefore should be close to being a full cash tax payer in 2008 resulting in an additional $100 million - $200 million in cash taxes. The company disclosed earlier this year that the IRS notified Liberty that it believes the interest expense deductions on exchangeable debt is overstated by using the comparable yield calculation (the interest that Liberty would pay had it issued straight debt) versus the low coupons used to calculate cash interest. Fitch estimates that total liability including interest and penalties could approximate $1 billion, however this potential liability has always been accounted for in our supplemental asset coverage calculations that deduct for deferred tax liabilities.

Aside from its basket of marketable securities, Liberty's liquidity is generally supported by $3.1 billion of cash and equivalents and $1.35 billion of available QVC credit facilities at September 30, 2007. The QVC facilities have delay draws through year-end which Fitch expects the Company to use and should result in pro forma availability of $500 million - $1 billion going forward. Despite the higher cash taxes, Fitch still expects the Company to generate annual free cash flow in excess of $600 million going forward. Covenants on the QVC facilities include a 4x maximum leverage covenant which also governs restricted payments out of the subsidiary. Liberty's indenture does not have any meaningful covenant protection.

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