Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) for
Advanced Micro Devices Inc. (NYSE: AMD) to 'B-' from 'CCC'. Fitch has
also rated AMD's private placement of $500 million senior notes due 2024
at 'B-/RR4'. The Rating Outlook is Stable. A full list of ratings
follows the end of this commentary. Fitch's actions affect approximately
$2.5 billion of total debt, including the revolving credit facility
(RCF).
The upgrades primarily reflect AMD's improved financial flexibility from
recent refinancing activity, which extends meaningful debt maturities
until 2019. AMD's refinancing activity provides incremental flexibility
to absorb any operational shortfalls during its ongoing business
transformation.
The company privately placed $500 million of senior unsecured notes due
2024 and will use net proceeds to repurchase $423 million of 8.125% of
senior notes due 2017. This follows AMD's private placement on Feb. 26,
2014 of $600 million of 6.75% senior notes due 2019 and subsequent
repurchase of $487 million of 6% convertible notes due 2015 during the
first quarter of 2014 (1Q'14).
The ratings and Outlook continue to incorporate Fitch's belief that,
despite near-term product momentum and the company's ongoing business
transformation, revenue visibility remains limited and annual free cash
flow (FCF) generation uneven. AMD seeks to increase revenues from
non-legacy personal computing (PC) markets to 50% from 20% of total
revenue by 2015.
AMD should resume positive revenue growth in the low- to mid-single
digits in 2014, driven by strong graphics accelerated processing unit
(APU) shipments. AMD's APU is designed into Microsoft's and Sony's newly
released game consoles, which have significantly outsold previous
generations to date and should add a degree of revenue visibility given
longer product life-cycles.
However, AMD's ability to offset continued weakness in legacy PC
markets, which the company forecasts will decline by 10% in 2014, also
depends on strong shipments of next-generation APUs for desktops, as
well as solid adoption of just launched low power APUs for tablets and
ultra-thin notebooks and discrete and professional graphics processing
units (GPU).
Fitch expects operating EBITDA margin will expand to a high single-digit
range in 2014 after bottoming in 2013, as a result of operating leverage
and lower fixed costs from completed restructuring. Longer-term
profitability will remain volatile but Fitch believes incremental
restructuring is likely should the company's business transformation lag
targets.
Fitch expects modest negative-to-flat FCF in 2014 after the company's
$200 million final payment to GLOBALFOUNDRIES in 1Q'14 for the
exclusivity waiver agreement. As a result, AMD should exit 2014 with
cash of just under $1 billion. AMD lowered its minimum cash requirement
to $600 million from $700 million in 2013, due to the company's
expectations for enhanced revenue visibility.
Credit protection measures should remain volatile with total
debt-to-operating EBITDA and operating EBITDA-to-gross interest expense
ranging from low- to mid-single digits over the next few years. Fitch
estimates total debt-to-operating EBITDA and operating EBITDA-to-gross
interest expense were 4.3x and 2.8x for the latest 12 months (LTM) ended
March 31, 2014, respectively, versus 6.7x and less than 1x for the
comparable prior year period.
RATINGS SENSITIVITIES
Fitch believes incremental positive rating actions could result from
enhanced revenue visibility and expectations for consistent FCF through
the cycle, both the result of AMD's successful business transformation.
Negative rating actions could result from substantial FCF usage,
resulting in cash balances declining toward the $600 million minimum
level. Fitch believes this could be due to greater than expected average
selling price (ASP) erosion for graphics APUs or stalled traction in
semi-custom servers and non-legacy PC businesses.
KEY RATINGS DRIVERS:
Ratings are supported by AMD's:
--Role as a credible alternative volume chip supplier for PCs, a large
albeit shrinking market, particularly for consumer PCs;
--Significant intellectual property (IP) for APUs and GPUs, which
underpin AMD's business transformation;
--Outsourced manufacturing model, relieving the company from significant
investments in leading-edge manufacturing capabilities and strengthening
FCF.
Ratings concerns include AMD's:
--Lack of revenue visibility, which should improve if the company's
business transformation is successful;
--Challenges for foundry partners to keep pace with Intel Corp.'s
(Intel) leading-edge manufacturing capabilities, potentially resulting
in structural cost and performance disadvantages for future products;
--Volatile profitability and FCF, due to mostly short technology and
product cycles and Intel-driven pricing pressures;
--Significantly less financial flexibility than that of key competitors,
including Intel, NVIDIA and Qualcomm.
Fitch believes liquidity was sufficient as of March 31, 2014 and
consisted of:
--$902 million of cash and cash equivalents (excludes $80 million of
long-term marketable securities), the vast majority of which was located
in the U.S.;
--$500 million senior secured RCF due 2018, of which $445 million was
available at March 31, 2014.
Pro forma for the private placement and repurchase of $500 million of
8.125% senior notes due 2017, total debt was $2.1 billion at March 31,
2014 and consisted primarily of:
--$42 million of 6% senior unsecured convertible notes due 2015;
--$600 million of 6.75% senior notes due 2019;
--$500 million of 7.75% senior unsecured notes due 2020;
--$500 million of 7.5% senior unsecured notes due 2022; and
--$500 million of private placement senior notes due 2024.
AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company
would be reorganized as a going concern rather than liquidated in a
bankruptcy scenario. To arrive at a going concern value, Fitch believes
AMD would: i) reorganize businesses serving target markets (graphics
chips and APUs), ii) wind down the legacy PC business, and iii) sell the
dense server business.
To reorganize the graphics business, Fitch starts with a $250 million
post-restructuring operating EBITDA and applies a 5x multiple (up from
4x due to positive product momentum and separation from the legacy PC
business) to arrive at a going concern value of $1.25 billion. Fitch
assumes value for the legacy-PC business is de minimis, given
expectations that AMD would contribute key IP to the graphics business.
Finally, Fitch assumes AMD sells the dense server business for $250
million, which represents a discount to AMD's $300 million purchase of
SeaMicro in 2012. Adding the $1.25 billion of going-concern value for
the graphics business and $250 million of proceeds leaves $1.35 billion
after subtracting 10% for administrative claims.
The fully drawn RCF would likely recover 100%, given Fitch's
expectations for receivables levels at default, resulting in an 'RR1'.
The senior unsecured debt would recover $850 million, or 42%, equating
to an 'RR4'.
Fitch upgraded AMD's ratings as follows:
--Long-term IDR to 'B-' from 'CCC';
--Senior secured RCF to 'BB-/RR1' from 'B/RR1';
--Senior unsecured debt to 'B-/RR4' from 'CCC/RR4'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832776
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