TEXT-S&P rates Advanced Micro Devices notes 'BB-'

Mon Aug 6, 2012 10:27am EDT

Overview
     -- U.S. semiconductor producer Advanced Micro Devices (AMD) is issuing 
$300 million senior unsecured notes due 2022.
     -- We anticipate revenue and margin declines over the next several 
quarters will result in higher leverage.
     -- We are revising our rating outlook on the company to negative from 
stable, and affirming our 'BB-' corporate credit rating, and assigning our 
'BB-' issue rating and '3' recovery rating to the new notes.
     -- The negative outlook reflects decreasing near-term operating 
performance, macroeconomic headwinds, and increased leverage.

Rating Action
On Aug. 6, 2012, Standard & Poor's Ratings Services revised its rating outlook 
on Advanced Micro Devices Inc. (AMD) to negative from stable. We also affirmed 
our 'BB-' corporate credit rating on the company.

At the same time, we assigned our 'BB-' issue-level rating to AMD's proposed 
$300 million senior unsecured notes due 2022.

The outlook revision reflects our view of the company's prospects for 
near-term operating weakness and its plan to refinance its August 2012 notes 
maturity, resulting in our anticipation of higher leverage over the next 12 
months.

The proposed notes will rank equally with all of AMD's existing and future 
senior unsecured debt. The company intends to use the proceeds from this 
offering, along with available cash, to refinance all of its $485 million 
outstanding senior unsecured convertible notes maturing Aug. 15, 2012.

Rationale
The 'BB-' corporate credit rating reflects AMD'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 the company's moderately leveraged balance sheet at this 
point, which we characterize as a "significant" financial risk profile. The 
ratings also reflect the company's "adequate" liquidity. 

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 AMD's prospects for new 
product sales following the anticipated launch of Microsoft's Windows 8 
operating system in the fourth quarter of 2012 will provide AMD an opportunity 
to resume revenue and profit growth and reverse near-term revenue and margin 
declines, which could result in modest revenue and EBITDA growth--as well as 
the potential for leverage to decline under 3x--in the second half of 2013. We 
expect AMD's continued commitment to R&D spending, in excess of 20% of 
revenues, will enable it to retain modest server market share, in support of 
revenue growth.

Over the longer term, we expect that AMD's revenue performance will remain 
constrained by competition from Intel, given Intel's "strong" business risk 
profile. AMD, with about $6.4 billion revenues and $900 million EBITDA for the 
latest 12 months ended June 30, 2012, 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 
International Data Corp. 

AMD faces challenges from ARM-based competitors as well, which are currently 
designing products for fast-growing tablet and smartphone markets. We expect 
tablet markets will constrain, but not eliminate, AMD's prospects for revenue 
and profit growth.
 
For 2012, we expect AMD's revenues will decline about 10% year over year due 
to weak global macro conditions, especially in Europe; competition from Intel; 
and tablet substitution from Apple and others. We expect AMD's 2012 EBITDA 
will decline 25% due to its investments in 28 nanometer production, inventory 
correction, and volume reductions. We expect 2012 reported free cash flow to 
amount to decline substantially from $528 million in 2011, due to lower 
volume, inventory correction, and about $50 million payments we anticipate it 
will pay to its primary wafer supplier, GLOBALFOUNDRIES (GF) before April 
January 2013 (a total of $225 million to be paid by April 2013). 

Our financial risk profile for AMD reflects the company's debt to EBITDA of 
about 2.5x as of June 30, 2012 and prospects for increasing leverage over 3.0x 
during the next several quarters. We expect leverage will subside below 3.0x 
later in 2013.

Liquidity
AMD maintains adequate liquidity from internal sources. The company at this 
point doesn't have a revolving credit facility. Cash and marketable securities 
amounted to $1.8 billion at June 30, 2012. We expect that by 
refinancing--rather than repaying--the $485 million August 2012 notes 
maturity, the company will 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, see the recovery report on AMD, to be 
published separately on RatingsDirect.

Outlook
The outlook is negative, reflecting decreasing near-term operating performance 
and increased leverage. A downgrade could result from a number of 
developments, including protracted 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 were to be 
sustained above 3x. We would consider an outlook revision to stable if 
leverage was on a trajectory to be sustained in the mid-2x range. 

Related Criteria And Research
     -- Industry Economic Outlook: Despite Economic Headwinds, Global 
Technology Shows Balanced Ratings Trend, July 9, 2012
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June 
29, 2012
     -- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, 
But Ratings Remain Stable, June 11, 2012
     -- Top 10 Investor Questions: How Will The Global Technology Industry 
Fare Amid An Economy In Flux?, April 26, 2012
     -- 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

Ratings Affirmed; Outlook Revision

Advanced Micro Devices Inc.
                                To                   From
 Corporate Credit Rating        BB-/Negative/--      BB-/Stable/--

New Ratings

Advanced Micro Devices Inc.
 Senior Unsecured
  $300 mil nts due 2022        BB-
   Recovery Rating             3

Ratings Affirmed

Advanced Micro Devices Inc.
 Senior Unsecured              BB-
   Recovery Rating             3
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