AMD fund-raising restricted by past debt deal

SAN FRANCISCO, April 20 Fri Apr 20, 2007 4:35pm EDT

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SAN FRANCISCO, April 20 (Reuters) - Advanced Micro Devices Inc. (AMD.N) is facing a cash crunch, but a fateful debt arrangement last year limits the No. 2 computer chipmaker's fund-raising options.

AMD's purchase of graphics chipmaker ATI was funded with $2.5 billion in debt, which came loaded with restrictions that would force the company to prepay the loan if it obtains more debt, issues shares, sells assets or even reduces working capital.

Some investors reckon AMD's only viable option is some sort of private equity deal -- an option executives welcomed explicitly for the first time on Thursday after reporting a surprisingly big $611 million quarterly net loss.

Speculation that AMD could be bought in its entirety by private equity firms has swirled in recent weeks, though most industry analysts voice skepticism about that prospect.

Some say it is possible AMD could sell a stake, however, in exchange for a cash infusion.

"It doesn't make a lot of sense that this is a place where private equity will be attracted, because it's a high capital-intensity business and you have a huge competitor," Cody Acree, an analyst with Stifel Nicolaus, said on Thursday.

"That's not to say it won't happen or couldn't happen, because private equity is a little crowded right now, so maybe they have to go out of their sweet spot," he said.

AMD's latest loss highlighted the tough time it has had competing with Intel Corp. (INTC.O), a much larger rival that is winning back business with faster computer processors and aggressive pricing.

GRIM NUMBERS

"We still foresee a meaningful degradation of AMD's cash balances," Citigroup analyst Glen Yeung wrote in a report.

The numbers are grim. Although AMD has nearly $1.2 billion in cash, it must fund a capacity expansion plan that will cost it $2 billion this year alone, even after a recent $500 million reduction aimed at keeping expenses in check.

It also has to buy expensive new production technology to keep up with Intel's upgrades as well as develop new processors to compete with more powerful and efficient ones coming out of its competitor's labs.

Meanwhile, revenue is under pressure amid a price war, which is not seen getting easier on AMD until it debuts a new high-end chip called Barcelona later this year.

The usual fund-raising options are less attractive due to the debt terms AMD agreed to when it bought ATI. A regulatory filing from last October details conditions under which AMD must pay back the debt early:

--All net proceeds from any new debt

--All cash proceeds from asset sales over $30 million

--All cash proceeds from sales of AMD's stake in its former memory chip unit, Spansion Inc. SPSN.O

--Half of the net proceeds from issuing new shares

--Half of excess cash flow

"The execution of the ATI merger was just sort of a disaster," said Doug Freedman, an analyst with American Technology Research, adding: "The guys who wrote the debt saw this coming."

It's still possible for AMD to issue new debt or shares, but the size required both to pay off the existing debt and raise enough cash would weigh on the balance sheet or drastically dilute the share count, angering investors.

"I got a feeling that anything that gets done would have to come with unbelievable covenants. Why would we think that they would get any less restrictive?" Freedman said of any new debt agreement.

Still, the rock-bottom interest rates available in today's debt market could still make that a good option for AMD.

"The debt market is almost free money at this point," Acree said. "It's Japanese interest rates. Money is there at very reasonable rates. You can borrow money and get a higher yield on that money sitting in the bank."

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