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QVC Inc.: A New 6.25% Baby Bond IPO

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About: Qurate Retail, Inc. (QRTEA)
by: Arbitrage Trader
Arbitrage Trader
Arbitrage, debt, bonds, short-term horizon
Summary

Overview of QVC's new baby bond, QVCC.

Brief overview of the company.

Comparison to the other securities in QVC's capital structure.

Comparison with all other baby bonds that pay a fixed rate and have a maturity of between 40 and 60 years.

Comparison with all investment grade baby bonds.

Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Baby Bond issued by QVC Inc, an indirect wholly-owned subsidiary of Qurate Retail Inc., formerly Liberty Interactive Corporation (QRTEA). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by QVC Inc - the prospectus.

Source: SEC.gov

For a total of 17.4M notes issued, the total gross proceeds to the company are $435M. You can find some relevant information about the new baby bond in the table below:

Source: Author's spreadsheet

QVC, Inc 6.250% Senior Secured Notes due 2068 (NYSE: QVCC) pay a fixed interest at a rate of 6.25%. The new issue bears a 'BBB-' Standard &Poor's rating, is callable as of 11/26/2024 and is maturing on 11/26/2068. QVCC is currently trading close to its par value at a price of $24.95 and has a 6.31% Yield-to-Call and a 6.27% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the "qualified equivalent" YTC and YTM sitting around 5.26% and 5.22%, respectively.

Here's the product's Yield-to-Call curve:

Source: Author's spreadsheet

The Company

Business overview

QVC curates and sells a wide variety of consumer products via highly engaging, video-rich, interactive shopping experiences, distributed to approximately 404 million worldwide households each day (including our joint venture in China as discussed below in further detail) through our broadcast networks as well as our over-the-top platforms (such as Apple TV, Roku, Amazon Fire, Facebook and others), our websites (including QVC.com, HSN.com and others), our mobile applications and our social pages. We believe we are the global leader in video retailing, e-commerce, mobile commerce and social commerce, with operations based in the U.S., Germany, Japan, the U.K. and Italy. Additionally, we have a 49% interest in a retailing joint venture in China, which operates through a television shopping channel with an associated website. The joint venture is accounted for as an equity method investment. Our operating strategy is to create premier shopping destinations for our customers across multiple broadcast, digital and emerging platforms (featuring fresh, relevant and compelling product selections and programming), further penetrate our core customer base, generate new customers and expand internationally to drive revenue and profitability. For the year ended December 31, 2018, approximately 93% of QVC's worldwide shipped sales were from repeat and reactivated customers (i.e., customers who made a purchase from us during the prior twelve months and customers who previously made a purchase from us but not during the prior twelve months). In the same period, QVC attracted approximately 4.4 million new customers and the global e-commerce operation comprised $5.8 billion, or 51%, of QVC's consolidated net revenue for the year ended December 31, 2018.

Qurate Retail Relationship

The Company is an indirect wholly-owned subsidiary of Qurate Retail, Inc. ("Qurate Retail") (formerly Liberty Interactive Corporation) (Nasdaq: QRTEA and QRTEB), which owns interests in a broad range of digital commerce businesses, including Zulily, LLC ("Zulily"), HSN prior to the transfer of ownership of HSN to QVC (described below), the Cornerstone Brands (the former subsidiary of HSN prior to the transfer of ownership of HSN to QVC, "CBI") and other minority investments. QVC is part of the Qurate Retail Group, formerly QVC Group, a portfolio of brands including QVC, HSN, Zulily and the Cornerstone brands. On March 9, 2018, Qurate Retail, GCI Liberty, Inc. ("GCI Liberty") (formerly General Communication, Inc.), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Qurate Retail completed the previously announced transactions whereby Qurate Retail acquired GCI Liberty through a reorganization in which certain assets and liabilities attributed to Qurate Retail's Ventures Group were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty. Qurate Retail then effected a tax-free separation of its controlling interest in the combined company. Qurate Retail's QVC Group common stock became the only outstanding common stock of Qurate Retail.

Source: 424B5 Filing by QVC Inc

Below you can see a price chart of QRTEA:

Source: Tradingview.com

Dividends

We have not paid any cash dividends on our common stock, and we have no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by our board of directors in light of our earnings, financial condition and other relevant considerations.

Source: Qurate Retail Group's 2018 Annual Report:

In addition, with a market capitalization of around $4.01B, QRTEA is one of the relatively large "Specialty Retail" companies listed on the NYSE (according to Finviz.com).

Capital Structure

Below you can see a snapshot of Qurate Retail's capital structure as of its last quarterly report in September 2019. You also can see how the capital structure evolved historically.

Source: Morningstar.com | Company's Balance Sheet

As of Q3 2019, QRTEA had a total debt of $7.54B, and with the newly issued 2068 notes, the total debt of the company becomes $7.97B, that are senior to the company's equity. This makes the Debt-to-Equity ratio at 1.67, which is not very satisfying from a fixed-income investors' point of view, meaning the company is quite leveraged.

Furthermore, we also want to add one more ratio, the Debt Payments-to-Earnings. One can use EBITDA instead of earnings, but we prefer to have our buffer in what's left to the common stockholder. The lower this ratio, the better (as long as the company is profitable). From the income statement, we can see the company had a net loss of $270M for the TTM with $330M paid as interest expense (to which another $27M yearly interest expenses for the newly issued baby bond must be added) that translates into a negative ratio of -0.90. However, it must be noted that the TTM loss is due to an unusual expense, an impairment of intangible assets of $1.02B for the Q3. If we take a look at the QRTEA's yearly results, we can see it is profitable for the past five years, $916M for 2018, $2.44B for 2017, $1.24B for 2016, $869M in 2015, and $537M in 2014.

The Family

QVC inc has one more outstanding baby bond: QVC Inc 6.375% Senior Secured Notes due 2067 (QVCD):

Source: Author's spreadsheet

QVCD also pays a fixed interest, at a rate of 6.375%. It bears a "BBB-" Standard & Poor's rating, too, but is callable and maturing a year earlier. Its call date is as of 09/13/2023, and maturity date as of 09/13/2067. QVCD is currently trading at a price of $25.16, translating into a 6.20% Yield-to-Call and 6.34% Yield-to-Maturity. If we compare it to QVCC, with a Yield-to-Worst (equal to its Yield-to-Maturity) of 6.27%, we can see the new issue having almost the same return as its "older brother."

In addition, in the following chart, you can see a comparison between QVCD and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). Generally a lot more volatile behavior of the bond vs. the ETF. QVCD had a much worse performance during the last year's mini-recession, which turns into a smashing outperformance throughout this year.

Source: Tradingview.com

Furthermore, there are 17 Corporate Bonds issued by the company:

Source: FINRA

For my comparison, I chose the 2043 fixed-rate Corporate Bond, QRTEA3977403. I realize that the comparison is certainly not perfect, but I find it good enough for the purposes of my analysis. Some information about the bond could be found in the table below.

Source: FINRA | QRTEA3977403

QRTEA3977403, as it is the FINRA ticker, also is rated BBB- and has a Yield-to-Maturity of 5.99%. This should be compared to the 6.31% Yield-to-Maturity of the newly issued baby bond, but when making that comparison, do remember that its YTM is the maximum you could realize if you hold QVCC until 2068. This results in a tiny yield spread of 0.3% between the two securities. It can be concluded that the Corporate Bond is the better from the two, giving the fact it has a much shorter maturity.

Sector Comparison

The image below contains all baby bonds that pay a fixed interest rate in the "Specialty Retail, Other" sector (according to Finviz.com). It's important to take note that none of these baby bonds are eligible for the 15% federal tax rate.

By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Here is the full list:

Source: Author's database

Fixed-Rated Baby Bonds

The next chart contains all baby bonds that pay a fixed interest, have a maturity date of between 40 and 60 years and also have a positive Yield-to-Call.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Investment Grade Rated Baby Bonds

This chart contains all baby bonds that pay a fixed interest, have a positive Yield-to-Call and carry an investment-grade S&P rating.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author's database

Special Considerations

Guarantees

The notes will be guaranteed by each of our material domestic subsidiaries that guarantee the borrowings under our senior secured credit facility and our existing notes (together, our "existing secured indebtedness").

Change of control

If we experience specific kinds of changes of control (as defined in "Description of Notes" herein), we will be required to make an offer to purchase the notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the repurchase date.

Source: 424B5 Filing by QVC Inc

Use of proceeds

We expect to use the net proceeds of this offering to repay a portion of the borrowings outstanding under our senior secured credit facility. Our senior secured credit facility is used for working capital purposes and, among other things, may be used for the repayment of other debt and the payment of dividends to Qurate Retail for general corporate purposes, including repurchases of its common stock.

Source: 424B5 Filing by QVC Inc

Addition to the iShares U.S. Preferred Stock ETF

With the current market capitalization of the new issue of around $435M, the new IPO can be considered with a high probability as an addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. It also will be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities. I'll just remind you about the last year rally in the fixed-income borne from the redemption of the two "giants" HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.

Conclusion

As fixed-income traders, we follow every preferred stock or baby bond which is listed on the stock exchange. As such, the newly issued QVCC is no exception, and the homework we always do we share it with the public. It's not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.

In terms of yields, QVCC has almost the same Yield-to-Worst as the other company's baby bonds, QVCD. Together, the two QVC's issues have the best YTW from the securities with a close maturity date, as only UZC has a higher return, having a Yield-to-Maturity of 7.18%. However, UZC is callable in a year, meaning it doesn't have much of call protection and its Yield-to-Worst (equal to its Yield-to-Call) actually is 4.37%. Continuing downwards, the picture also is similar to the other investment-grade baby bonds comparison.

As for negatives, I see the poor performance of the common stock, QRTEA, and the fact the company is pretty high leveraged. The company suffers a loss in the Q3, mainly due to an unexpected expense, turning the twelve-trailing-months' result into a loss. Still, this cannot be considered as something regular after we take a look at the previous year's yearly reports. Generally, the newly issued baby bond seems to be a good investment, high yield, investment grade, but it cannot help but make an impression, other similar recently issued securities, priced with much lower nominal yield - Aegon's AEFC, BBB rated, having a nominal yield of 5.10%, Sempra Energy's SREA, rated a BBB-, priced at 5.75%. We can even see South Jersey Industries' SJIJ with a rating of BB+ to have a nominal yield of 5.625%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.