Fitch Downgrades AMD's IDR to 'CCC' from 'B'
CHICAGO -- January 30, 2013
Fitch Ratings has downgraded the following ratings for Advanced Micro Devices
Inc.'s (NYSE: AMD):
--Long-term IDR to 'CCC' from 'B';
--Senior unsecured debt to 'CCC/RR4' from 'B/RR4'.
Fitch's actions affect approximately $2.1 billion of total debt.
The ratings reflect Fitch's expectations that negative free cash flow (FCF) in
2013 will drive cash below AMD's target level and potentially approach the
company's minimum operating level. Beyond the near-term, Fitch believes a
strong end market recovery and adoption of AMD's new products will be required
to preserve cash during the company's multi-year transformation.
Fitch expects negative revenue growth in the mid- to high-teens for 2013,
driven by weak consumer spending, robust tablet penetration and lingering
excess channel inventory anticipated for the first half of the year. Revenue
growth could turn positive in the back half of 2013, assuming strong sales of
AMD's new products.
Negative revenue growth will drive profitability lower in 2013, despite
restructuring actions expected to reduce quarterly operating expenses to $450
million by the September 2013 quarter. Fitch expects negative FCF of $250
million to $450 million in 2013 from lower profitability levels and inventory
builds related to new product ramps.
AMD's cash usage will be amplified by cash payments to GLOBALFOUNDRIES (GF)
for amendments to the wafer supply agreement (WSA), including $215 million in
fiscal 2013 and $200 million at the beginning of fiscal 2014. These cash
outflows could be partially offset by proceeds from AMD's proposed office
building sale-and-leaseback transaction.
AMD is planning first half of 2013 launches of system-on-a-chip (SoC)
accelerated processors for ultra-low power mobility and tablet products and
solid revenue growth in the second of 2013 from ramps of a broad set of design
wins. Delays to these launches, the expected market recovery, or product sales
ramps would exacerbate Fitch forecasts.
Credit protection measures will remain volatile, due to variations in
profitability. Fitch estimates total leverage was 4.2x for 2012 but may
approach 10x in 2013. Fitch estimates interest coverage was 2.8x for 2012 but
could fall to 1x in 2013.
AMD's transformation targets higher-growth markets, including ultra-low-power
mobility, high-density servers and semi-custom embedded products. Given AMD's
traditional PC markets represent the vast majority of sales, achieving the
company's target of 40%-50% of sales from higher-growth markets will require a
number of years.
Fitch believes liquidity was sufficient as of Dec. 29, 2012, and consisted of
$1.18 billion of cash and cash equivalents, including $181 million of
long-term marketable securities. Fitch expects negative FCF of $250 million to
$450 million for the current year, pressuring liquidity by the end 2013. The
company has a stated target cash level of $1.1 billion and minimum operating
cash level of $700 million.
Total debt was $2.1 billion at Dec. 29, 2012 and consisted of:
--$580 million of 6% senior unsecured convertible notes due 2015;
--$500 million of 8.125% senior unsecured notes due 2017;
--$500 million of 7.75% senior unsecured notes due 2020;
--$500 million of 7.5% senior unsecured notes due 2022;
--Approximately $25 million of capital leases.
AMD's ratings continue to be supported by:
--Low capital intensity as a fabless semiconductor maker, resulting in a
stronger FCF profile;
--Reduced revenue breakeven profitability, pro forma for the completion of
current restructuring initiatives;
--The company's role as the only current viable alternative microprocessor
supplier to Intel, although Fitch expects new entrants in certain markets over
the intermediate term.
Fitch's concerns center on:
--Limited financial flexibility, given cash usage trends;
--AMD's modest share of the overall PC market and limited share in rapidly
growing small-form factor mobility products;
--High R&D intensity as a fabless semiconductor maker.
Further negative rating actions could be taken if the penetration of new APU
products is lackluster, resulting in revenue declines and cash usage beyond
Positive rating actions could occur if:
--FCF exceeds the upper end of Fitch's base case range;
--Strong adoption of new products, portending solid revenue growth and
positive FCF in 2014.
AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be
reorganized rather than liquidated in a bankruptcy scenario. This is given
Fitch's estimates that AMD's reorganization value of approximately $1 billion
exceeds a projected liquidation value of $682 million.
To arrive at a reorganization value, Fitch assumes a 4x reorganization
multiple and applies it to its estimate of distressed operating EBITDA of $260
million, which covers estimated annual fixed charges, resulting in an adjusted
reorganization value of $939 million after subtracting administrative claims.
Fitch estimates the approximately $2.1 billion of unsecured claims recover
approximately 45%, resulting in an RR of 'RR4'.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate rating methodology' (Aug. 8, 2012);
--'Rating Global Technology Companies Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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