TEXT-S&P raises Advanced Micro Devices rating to 'BB-'

Wed Apr 25, 2012 11:54am EDT

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