qurate retail group 8% preferred stock as pitched by travisTravis pitched this as a double play: either the stock picks up after its significant stock price decline to around $41/sh at the time Travis was discussing it with the idea that have a backstop if you wait 8 years to maturity and get 8% like a bond.or you collect out-sized dividends of 8.00/year along the way as a stock. The stock has paid this monstrous dividend so far but the stock price has stumbled over the last couple weeks. Opportunity, time to be patient or time to panic? What do you think, Travis?
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I’ve covered this a couple more times along the way, since I originally bought the Preferred Shares (QRTEP). The business got meaningfully worse earlier this year, as they failed to get any real bounce-back in their operations as hoped, but they also continued to reiterate that they have ample liquidity to pay those preferred dividends for at least a while.
Bankruptcy is the clear risk, because in bankruptcy the lenders would almost certainly fail to be completely satisfied, which means there would very likely be nothing left for preferred shareholders (let alone common shareholders).
Here’s part of what I said in a later update, back in March:
And here was the update in May, following their first quarter:
Last quarter, announced in August, revenue was down but they got the rest of their insurance settlement from the Rocky Mount Fire, offloaded the suffering Zulily business, and they repaid some of the near-term debt and talked about success with their Project Athens turnaround strategy, and they talked about profitability improving through the year. They’re still compliant with their debt covenants. On the call, they continue to say that they expect to repay their debt that comes due in 2024 through some combination of their current revolver loan and their free cash flow, with the anticipation that at some point rates will be more attractive for a longer-term refinancing of debt.
I think there’s still a meaningful risk of bankruptcy, and that risk grew this year, which is clearly signaled by the falling price of the common shares, but I also think it’s still worth holding as our dividends reduce the risk and there is a reasonable probability that the company will survive this downturn, continue their turnaround, and come out the other side in reasonable-enough shape to refinance. This is one of the highest upside preferred shares out there, and it’s notable that they are not “giving up” and deferring their preferred share dividends like many distressed preferred shares have, but it is still clearly distressed and risky.
My original bet was that they would survive the 2024-2025 debt refinancing cycle and continue to pay preferred dividends, which would give them some hope of a recovery over the subsequent years and that possibility, if the business does reasonably well and can refinance at some point, of either calling those preferreds (not very likely at this point) or repaying them, as required, at $100 in 2029. I continue to take my dividends in cash to reduce my capital at risk.
I am still willing to hold on, but I’m not so optimistic that I would put more capital at risk at these lower prices. The business has gotten worse, which is the major risk, but the balance sheet has gotten a bit better as they’ve repaid some debt and gotten their final insurance settlement. If the business keeps getting worse, nothing else will matter, they’ll eventually go bankrupt… if the Project Athens turnaround continues to show some promise, and their free cash flow continues to improve, then they have a reasonable chance of rewarding the preferred shareholders and continuing to stay current on their debt.
Here’s how I’d sum it up now: This is not as good a risk/reward setup as it was when I first bought the preferreds (a judgement call, both then and now)… but it is meaningfully cheaper so it has gotten more extreme on both the risk and the reward side. The risk of bankruptcy in the next ~3-4 years has increased, so the probability of an eventual “zero” has risen, and they key refinance dates of 2024 and 2025 are closer in time now, but the price has also fallen so the “if it does work out” performance would be more dramatic, with 300% capital gains on top of the dividend if they survive for another six years, and a very high 35% dividend yield along the way.
This is reflected in the QVC and Qurate debt, too, which has reacted both to higher interest rates and to the rising risk of bankruptcy — the publicly traded long-term QVC notes (QVCC) are now trading at about a 20% yield, and are priced at about 1/3 of the principal value (versus 2/3 and about 10% last Fall), those do not have any real chance of a maturity repayment in the foreseeable future (they’re 50-year notes), but they are certainly in front of QRTEP in any bankruptcy settlement. The 2024 and 2025 debt is still trading as if it’s likely to be repaid (13% and 16% yield to maturity, respectively), but the Feb 2027 and sept 2028 maturities are trading at 50-60 cents on the dollar, with current yield of ~9% and yield to maturity of ~23%, so there’s clearly some major risk represented by those assessments of bondholders, and there’s very little bidding on those 2027 and 2028 maturities, but perhaps they haven’t entirely given up yet. Because the debt levels are so high, and the asset value based so much on the QVC brand, I would hesitate to assume that a bankruptcy proceeding would lead to anything close to a full return of principal for bondholders — if they go bankrupt, it will be because QVC and HSN continue to decline and have little value, and those brands are most of their asset base. If they don’t go bankrupt, the returns are significantly higher for the preferreds than for the debtholders.
That’s what I think. The equity price and the preferred share price right now are telling you that the risk of bankruptcy is growing, and I still think it’s worth betting against that… but I could absolutely be wrong, a lot rides on the next year of the turnaround, and particularly on their holiday quarter sales.