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QVC: Fraudulent Transfer Considerations
Mark Lightner, Esq. – Head of Special Situations Legal Research
Joshua Kramer – Senior Analyst - Special Situations
James Goldstein, CFA – Senior Analyst - Retail and Gaming
EXECUTIVE SUMMARY
- QVC has been paying significant dividends to its affiliates – Qurate Retail (QRI) and Liberty Interactive – to improve aspects of their balance sheets and to provide them with liquidity to make payments on their funded debt and preferred equity obligations. In discussions with clients since our coverage initiation earlier this year, we have fielded inquiries about fraudulent transfer concerns relating to the Q4 2022 inter-company cash transfers via dividends. This note seeks to address the foundation of those questions.
- We analyze whether the dividends – in particular, dividends made in Q4 2022 – might be constructive fraudulent transfers if QVC were to file for chapter 11. We conclude that strong arguments can be made with respect to the transfer, timing, and reasonably equivalent value elements of a constructive fraudulent transfer claim. However, we conclude that it may be difficult to prove that QVC was financially troubled (e.g., insolvent) at the time the transfers were made, which undermines the strength of any potential claim.
- In any event, we note that even if a strong constructive fraudulent transfer claim could be asserted with respect to the dividends, we would expect that all affiliates of QVC (including QRI and Liberty Interactive) would similarly be debtors within the same consolidated bankruptcy proceeding. Accordingly, any constructive fraudulent transfer claim against QRI and Liberty Interactive would likely be a bankruptcy claim or even viewed merely as an intercompany claim. In our experience, claims between debtor-affiliates are often viewed as less significant in jointly administered reorganization cases, and we could see this claim ultimately having little value. We also think any potential claim against subsequent transferees of the Q4 2022 dividends (i.e., preferred equity or bondholders) may prove to be difficult.
- We note that the Company may seek to maximize optionality by attempting to run out the clock on the lookback period for constructive fraudulent transfer claims by getting through the 2025 QVC maturities.
BACKGROUND
On April 10, 2023, we initiated coverage on Qurate Retail, Inc. (f/k/a Liberty Interactive Corporation) (“QRI”) and its affiliates, including Zulily, LLC (“Zulily”), Liberty Interactive LLC (“Liberty Interactive”), QVC, Inc. (“QVC”), QVC Global Corporate Holdings, LLC (“QVC Global”), and Cornerstone Brands, Inc. (“CBI,” and with the other affiliates, collectively, the “Company”). See Qurate Retail (QVC & LINTA): Initiating Coverage. On May 5, 2023, we issued an updated report on the Company that incorporated and reflected results from Q1 2023. See Qurate Retail 1Q23: Results and Model Update. On May 24, 2023, we discussed the Company’s announcement that it was selling Zulily to Regent for an undisclosed amount and an earn-out, and we expect the sale to close this summer or early in the fall. See LINTA/QVC: Free Zulily.
QRI is the issuer of Preferred Equity in the amount of $1.269bn, and Liberty Interactive is the issuer of the Senior Debentures and Exchangeable Senior Debentures in the amounts of $792mm and $956mm, respectively. QVC, Zulily, CBI, and QVC Global are co-borrowers on that certain $3.25bn multi-currency revolver (the “Revolver”), which has been in place since October 2021 when QVC amended and restated its senior secured credit facility. The amounts drawn on the Revolver are approximately $1,240m pro-forma for the Zulily divestiture. All co-borrowers under the Revolver are jointly and severally liable for obligations under it, and certain subsidiaries of those co-borrowers have also provided guarantees. We note, however, that QRI will pay down $80m on the Revolver to release Zulily from its obligations under it as part of the sale to Regent, as noted above.
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