Fitch Downgrades Liberty Media to 'BB+'; Outlook Negative.

NEW YORK -- Fitch Ratings has downgraded Liberty Media Corp.'s (Liberty) senior unsecured debt to 'BB+' from 'BBB-' and has removed the company from Rating Watch Negative. The Rating Outlook is Negative. Approximately $10.9 billion of accreted debt is affected by this action.

The rating downgrade reflects Fitch's continued concern regarding the company's uncertain strategic direction, reduction of the asset base, potential for a News Corp. transaction to further weaken the company's credit profile, and Fitch's belief that more shareholder-friendly transactions could occur in the intermediate term. Today's announced shareholder dividend of Liberty's 50% stake in Discovery and 100% stake in Ascent Media clearly negatively affects bondholders and provides a clearer statement to how Liberty may utilize its asset base. The spin-off of these entities eliminates approximately $7.0 billion, or 16%, of total asset value used in Fitch's calculation of asset coverage (asset value/net debt) reducing Liberty's asset coverage to 4.1 times (x) from 4.8x. Regardless of the success of the spin-off, Fitch believes Liberty will continue to consider ways to unlock value for shareholders, potentially through the distribution of other assets and/or cash, further weakening the position of bondholders. Fitch believes the Discovery/Ascent Media spin-off highlights senior management's various public comments that the company is continuing to explore ways to unlock shareholder value and increases Fitch's concern regarding the strategic direction of the company and the potential negative implications for bondholders.

The Negative Outlook reflects the risk related to the overall long-term strategic direction of the company. This uncertainty includes plans related to future dividends, acquisitions, asset sales, liquidations, and any other strategic event of the company. The recent statements from Chairman John Malone regarding potentially splitting up the businesses, breaking the company up into separate units that would house different businesses (i.e. split up Interactive businesses such as QVC from the Network businesses such as Game Show Network and Court TV) could also negatively impact bondholders. There are credit risks involved in such a move, as it is currently unclear how the company would allocate its assets and debt to the new separate entities. The company's credit profile may not be the main determinant in the allocation of assets and debt to these new entities, and there are no covenants preventing management from splitting off these entities.

Fitch's concerns also include a potential transaction regarding Liberty's 18% voting stake in News Corporation ('BBB'/Stable). Given the Bush administration's recent 2006 budget proposal, which is said to contain new restrictions on cash-rich tax shelters, Fitch believes a transaction with News Corporation could occur within the next 3-6 months and will likely take the form of News Corporation operating assets with cash proceeds. While Fitch believes the Discovery/Ascent Media dividend announcement reduces the likelihood that significant cash proceeds from a News Corporation transaction could be used for shareholder distributions, it is likely that News Corporation proceeds will be used to invest into new operating businesses, which could also negatively affect bondholders due to the potential change in mix of available for sale securities and private assets having meaningful liquidity implications. Depending on the size of a News Corporation transaction, Liberty could lose up to 50% of its liquid asset base by investing in less-liquid operating businesses, which could reduce the ratio of liquid assets (including derivative positions) to net debt to below 1.5 times (x) (to a minimum of 1.1x assuming the entire $9 billion News Corp. stake is invested in nonliquid operating businesses). Clearly the operating risk profile and the cash flow characteristics of such investments would be analyzed as to determine the offset to the loss of liquidity.

Furthermore, Liberty's use of News Corporation proceeds to acquire an operating business could cause Fitch to re-assess the company's credit profile using more traditional operating credit metrics (e.g. interest coverage and leverage ratios), as opposed to Fitch's current analysis, which focuses on, among other things, asset coverage. Therefore, should the company decide to invest the News Corporation proceeds in an operating business, it would have to generate sufficient cash flow to offset the loss of liquidity and asset coverage. As of Dec. 31, 2004, Liberty has a leverage ratio of approximately 6.8x and an interest coverage ratio of approximately 2.6x.

Despite the various aforementioned concerns and downgrade event, Liberty's 'BB+' rating is supported by strong asset coverage ratios that combine the private liquidation value of Liberty's operating business stakes (QVC, Starz, and Court TV, among others) with its public security holdings and derivative positions. As of March 9, 2004, Fitch estimates Liberty's public portfolio, including derivatives to be approximately $20.5 billion with the private portfolio at approximately $18 billion pro forma for the Discovery/Ascent Media dividend and before any substantial private liquidation haircuts. Liberty's gross debt is estimated at $10.9 billion. This results in asset coverage (public and private assets divided by net debt) of approximately 4.1x. The rating is further supported by continued strong operating performance of the company's QVC operating unit and Liberty's continued execution of its voluntary debt reduction program EBITDA from the QVC segment, which increased approximately 19% year-over-year to $1.2 billion as the unit benefited from increased volume sales and a favorable exchange rate at its foreign units.

As mentioned, Liberty continues to execute its voluntary debt reduction program through the monetization of nonstrategic investments, use of cash balances, and proceeds from equity collar expirations. The program was announced in November 2003 when debt was approximately $14.5 billion and has since reduced debt by approximately $3.6 billion to $10.9 billion in debt as of Dec. 31, 2004. Fitch expects the company to complete this program in 2005, with an additional $1 billion reduction in total debt by year-end 2005, for a total reduction of $4.5 billion.