TEXT-S&P raises Advanced Micro Devices rating to 'BB-'
Overview -- U.S. Advanced Micro Devices (AMD) announced in February 2012 its plans to de-lever through repayment of $485 million notes due August 2012. -- AMD recently amended its wafer supply agreement with foundry partner GLOBALFOUNDRIES in March 2012 and as a result, AMD may source 28 nanometer wafers from alternate suppliers, to the potential benefit of its revenues and operating profitability. -- We are raising our corporate credit and senior unsecured issue ratings on AMD to 'BB-' from 'B+', removing the ratings from CreditWatch Positive. -- The stable outlook reflects our expectation that AMD's financial profile will offset ongoing and considerable business risk. Rating Action On April 25, 2012, Standard & Poor's Rating Services raised its corporate credit and senior unsecured issue ratings on Sunnyvale, Calif.-based Advanced Micro Devices Inc. (AMD) to 'BB-' from 'B+'. At the same time, we removed the ratings from CreditWatch, where they were placed with positive implications on Jan. 31, 2012. The rating outlook is stable. The upgrade reflects AMD's improved financial profile, along with an improved business risk profile. It also reflects the company's prospects for further revenue, earnings, and market share stability, given improved execution of wafer supply from GLOBALFOUNDRIES (GF), recent contractual amendments with GF, and AMD's commitment to ample product development spending. AMD maintains a simple capital structure, composed of a modest amount of capital leases (about $30 million outstanding at March 31, 2012) and about $2.1 billion of senior unsecured notes, due between 2012 and 2020, including two senior unsecured convertible note tranches. We rate AMD's senior unsecured notes at 'BB-' (the same as the corporate credit rating) with a recovery rating of '3', indicating average (30%-50%) of recovery in the event of a payment default. Rationale The 'BB-' corporate credit rating on AMD reflects the company's "weak" business risk profile, characterized by intense competition from Intel Corp. and the threat of competition from ARM-based (a type of computing instruction set) competitors, partly offset by AMD's "significant" financial risk profile, with considerable support provided by its lightly leveraged balance sheet and "adequate" liquidity. Our assessment of the company's business risk profile also incorporates AMD's commitment to R&D spending, which we expect will continue to represent about 22% of revenue. We expect smartphone and computing tablet growth will reduce demand for x86-based (a family of computing instruction set architectures) computing and will support cloud-based server demand. We expect x86-based and server demand will provide AMD an opportunity to achieve further revenue and profit growth. We expect that AMD's revenue growth will remain constrained by competition from Intel, given Intel's "strong" business risk profile. With about $6.5 billion revenues and $930 million EBITDA for the latest 12 months ended March 31, 2012, AMD possesses a relatively modest x86 unit and revenue market share relative to Intel, which has much larger share (about 95% unit share) in server markets, as well as 85% unit share in notebook markets, and over 75% unit share in desktop markets, as measured by IDC. AMD faces challenges as well by ARM-based competitors, which are currently designing products for fast-growing tablet and smartphone markets. We expect tablet markets will grow to represent in excess of 25% of collective PC and tablet units worldwide over the next several years and will constrain, but not eliminate, AMD's prospects for revenue and profit growth. We have revised our business risk profile for AMD to weak from "vulnerable," reflecting our anticipation of further profit stability and growth due to the company's recent wafer amendment with GF, which provides AMD with greater flexibility to source wafers from Taiwan Semiconductor Manufacturing Co. Ltd (TSMC), if needed. AMD's EBITDA margins have stabilized over the past several years at about 15%, following the company's divestiture of its manufacturing assets to GF. We expect AMD's R&D spending will continue to represent about 22% of revenues in the future, given the brevity of industry product lifecycles and intense competition. We have revised our financial risk profile for AMD to significant from "aggressive," reflecting the company's improving financial metrics, including debt to EBITDA of about 2.3x as of March 31, 2012, adjusted for operating leases and stock compensation, as well as strong free cash flow in excess of about $400 million annually since September 2011. We expect AMD's financial leverage will decline to about 1.9x after the anticipated debt reduction later in 2012. Although the company's financial metrics currently appear stronger than indicated by our financial risk assessment, its relatively short track record at current levels and execution risks in highly competitive markets drive its weak financial risk profile. Considering AMD's outsourced manufacturing business model, we expect that capital expenditures will continue to represent only about 4% of revenues and free cash flow will amount to about $500 million annually. Liquidity AMD maintains adequate liquidity from internal sources. The company currently has no plans to obtain a revolving credit facility. Cash and marketable securities amounted to $1.7 billion at March 31, 2012, down about $200 million from about $1.9 billion at Dec. 31, 2011, due primarily to about $293 million cash spent to acquire SeaMicro, a server provider to cloud-based computing markets, in the March quarter. We expect that AMD, given its liquidity profile, will be able to fund remaining nonrecurring amendment payments to GF (about $275 million through the March quarter of 2013), repay its August 2012 notes' maturity ($485 million), and maintain cash above its minimum target of $1.5 billion. Our assessment of AMD's liquidity profile incorporates the following expectations, assumptions, and factors: -- We expect coverage of uses to be in excess of 1.2x for the next 12 to 24 months. -- We believe that net sources would be positive in the near term, even with a 15% to 20% decline in EBITDA. -- Debt maturities are well paced, with maturities of less than $600 million in any one year and spread through 2020. AMD plans to limit debt maturities to no more than $500 million per year as part of its long-term capital structure goal. Recovery analysis For the complete recovery analysis, please see our recovery report on AMD, to be published separately on RatingsDirect. Outlook The outlook is stable. We expect AMD's financial profile to offset ongoing and considerable business risk. A rating downgrade could result from a number of developments, including sharply lower demand, erosion of market share, or weaker manufacturing execution. Any of these scenarios could weaken the financial profile that supports the rating. Specifically, we would consider a lower rating if liquidity fell below $1 billion or if leverage was on a trajectory to exceed 3x. We would consider a higher rating once AMD builds a track record of stable to growing market share and earnings have been well established, leading us to conclude the leverage could remain over time at or below 2x. Given AMD's competitive and cyclical operating environment, an upgrade is unlikely over at least the next 12 to 18 months. Related Criteria And Research -- Global Technology Ratings Trend Shifts To Negative In The First Quarter, April 11, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 29, 2012 -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012 -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 13, 2011 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Upgraded; And Off CreditWatch To From Advanced Micro Devices Inc. Corporate Credit Rating BB-/Stable/-- B+/Watch Pos/-- Senior Unsecured BB- B+/Watch Pos Recovery Rating 3 3