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US CREDIT-Liberty Media outlook brightens on debt diet

By Eric Burroughs

NEW YORK, Nov 25 (Reuters) - The past two weeks have been winners for Liberty Media investors, but so far, only credit players seem to be enjoying the news of the company's sturdier outlook after it avoided being cut to junk status by Moody's.

Liberty Media offered solid third-quarter earnings two weeks ago and last Thursday announced it will cut its debt by $4.5 billion over the next two years, saying it is trying to get its balance sheet in better shape after a series of acquisitions.

That debt reduction plan, along with other reassurances, in turn prodded Moody's Investors Service to affirm the company's rating, after the agency threatened to slash it to junk. All three major ratings agencies classify Liberty at the very edge of investment grade.

The potent combo of Moody's ratings affirmation and the debt reduction plan ignited a powerful rally in credit markets, as the big holding company of cable and telecommunication assets tries to transform into more of a direct media outfit.

Liberty's credit default swaps and corporate bonds rallied hard, especially in short-dated maturities, even as the stock lagged by comparison. Some traders said the credit rally may not be over with the Moody's decision out of the way and other analysts upbeat about Liberty's prospects.

"It seems like they're going to do better," one trader said of Liberty, whose assets and investments range widely, from a hefty chunk of News Corp. to 98 percent of QVC Inc. and Discovery Communications Inc. and Starz.

The standard five-year default swap spread on Liberty traded just under 100 basis points Tuesday, or roughly $10,000 a year for $1 million of default protection. That is down from 175 basis points before its earnings announcement, a 45 percent improvement.

Its less-traded three-year spread has rallied even more, by 55 percent, reflecting the reduced risk of near-term default with the plan to reduce outstanding debt to $9.9 billion by the end of 2005, after accumulating $5 billion in debt to pick up QVC. During the same period, the stock is up 7 percent, hitting a 2-1/2 month high Tuesday.

While such a debt diet has obvious benefits for the company's credit standing, Liberty said that reducing debt also will give it more scope to invest for future growth.

Liberty's game plan for slimming down its debt responded to the worries of Moody's analysts and happened to be announced the same day as Moody's reaffirmed the ratings, helping end the doubts about the company.

When Moody's put Liberty's rating on review for a downgrade in July, its analysts pointed to the cost of purchasing more of QVC, the cable and Internet shopping channel, its then flirting with Vivendi's media assets and other potential acquisitions that would add to its debt burden.

From an equity perspective, a few analysts have issued buy recommendations on the stock, mainly because they say the stock trades at a notable discount to its net asset value.

Matthew Harrigan at Janco Partners said in a research note Monday a 32 percent discount to net asset value "is overdone in the context of few comparable large content company media value plays."

As for the other ratings agencies, Standard & Poor's said the company's BBB-minus rating and stable outlook are based on an assumption the company's planned stock buybacks would take place at a "judicious" pace within its free cash flow.

Fitch, which also rates Liberty BBB-minus with a stable outlook, said the company's actions mitigate its worries about a further debt stemming from more investments and acquisitions to become a full-fledged media operator or future share repurchases.

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