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