60, had a few minutes in between meetings and was giving this article from the Substack poster some thought. I lean back into my view that it doesn't make much sense if you try and break the math out and still makes me think some prepack or freefall event is more probable. Open to feedback/discussion on this though. Encouraged discussion please by all seven of us in this thread :) :) :)
As of Q2 the company now pays $248.73M on all their QVC, Inc senior secured debt (excludes all HoldCo & ParCo debts). $116.66M on facility and rest of senior notes is $132.08M.
In Q1 they had $1,850M drawn on the facility at 6.06% rate meaning ~$112.11M annual interest expense. By Q2 this grew to $1,925M at 6.06% so ~$4.55M increase in expense bringing total to ~$116.66M. Now the $975M draw came in July so wasn't "on the books" yet which brings facility to $2,900M drawn by Q3 2025 and at 6.06% rate this is ~$175.74M expense or a $63.63M total increase in interest expense over the Q1 $1,850M. In total they now will pay $307.82M in facility + senior secured notes at QVC, Inc.
Reality is they are in negotiations with the banks now to refinance the facility as it matures in October 2026 and refi will likely need to happen before that date. I can only guess to some degree but SOFR yesterday was 4.35% and QVC gets hit with a margin rate depending on facility draw and since facility is almost fully drawn I would assume max margin impact which is currently 1.625%. Given FITCH has downgraded them twice this year their current senior secured debt rating is B but QVC, Inc itself is CCC+. If I go with B, the spread is currently 3.08%. In total this puts their new potential rate around 9.06% up from 6.06%. I cannot see them getting a credit upgrade even if they retire some debt as the leverage on a bank credit level is still high ($2,900M) and EBITDA is projected to be on decline to $800-900M. I also find the 9.06% to be directionally close given the fact QVC, Inc itself has been downgraded multiple times this year alone.
Sooooooooo.......let's say they magically convince all senior holders to take a haircut for an LME and they can use their current cash + revolver ($897M + $975M = $1,872M) to retire this debt. This saves the company $132.08M in bond/note interest expense BUT because new facility rate likely goes to 9.06% this means interest on the $2,900M drawn is now at $262.60M so in total the company only saves $45.22M annually by making this move. There is some early extinguishment gains here depending on what debt is retired for but no way I can estimate that and tax impacts. I would also counter any senior haircuts are still likely offset with equity swap - no free risk-lunch for management.
One could challenge leverage ratio now improves and they can issue new debts to fund facility paydown but then I challenge we're right back to square one arn't we? EBITDA is still down from $1.9B in 2019 to estimated $800-900M and currently no signs of stability. Company also has $721M in notes due between 2027-2029 with the rest ($1,425M) all happening between 2034-2068. I guess from this level they only save $45.22M annually and are bringing forward a ton of debt maturities - guess I am just lost on what's the value in this move. Even if new rate goes from 6.06% to 8.5% that's only a $61.32M savings annually which I suppose is nice but not as powerful as I am being sold in this Substack.
Now I see some of this debate the company can tackle LITNA unsecured or even prefered equity but I am not sure that would EVER fly. Why would a senior bond holder allow the OpCo to increase debt at OpCo to upstream cash to HoldCo or ParCo so they can retire their debts? Doesn't change leverage at OpCo either. Senior holders essentially move down in priority and have their cushion decreased by this and all it does is transfer debt from HoldCo and/or ParCo to OpCo even if it is $0.10-$0.25 on the dollar. Again, if I am a senior holder this doesn't add up.
So the core of the problem is EBITDA is in decline and they still have $2.9B of bank debt to tackle that is currently due in 2026 and at best is extended to 2028. It really just brought things forward and didn't fix too much from my view. FCF would need to be over $400M a year to get back to where they were but with EBITDA in decline and this move only creating a cash savings of $45.22-61.32M annually that's not too much buffer especially because cable has been in decline in a perceived bull market so if economy does contract in 2026-2028 do we see cord-cutting slowing? David Rawlinson stated 90% of QxH revenue still is comnig from linear cable/digital. Meaning if I am the banks I see a lot of volatility in EBITDA & by proxy cash flows and this year alone they've already burned $156M at QVC Group with QVC, Inc burning $75M. As I said before if they end up having to file within two years after this they open themselves up to clawbacks possibly too.
We also need to consider they can't burn all the cash because they still need to fund working capital, social spending to gain share on Tiktok, and various other things. Meaning they can't use all $1,872M for this maneuver.
So if this is a napkin math breakdown; the question I ask is what could management gain by drawing this? War chest for prepack or freefall is where my mind goes back to. It's a typical move done before a company files. If this were an LME why Kirkland and Evercore + Roger and Carol be required? Lot of firepower. Bond holders brought in legal teams too and this was all in May and it's now August. No live Q&A isn't something you do because you're moving on an LME I wouldn't think either.
I saw this post shared where Liberty/QVC did this in 2008 but I again state it's not the same company and current conditions are not the same either. If I recall the world was going through a bit of a credit pickle in 2008.
Anyway, just some thoughts that my mind wouldn't let go of once I read what you shared. Once I lock in, I lock in, so needed to write this up to mentally move on :D.
I hear hooves, but am not sure I should be expecting a zebra.
Look forward to any discussion.
Happy Investing.
Sean |
