TEXT-Fitch affirms AMD rating at 'B'
Aug 6 - Fitch rates Advanced Micro Devices Inc.'s (NYSE: AMD) Senior Notes due 2022 at 'B+/RR3' and affirms the following ratings for the company: --Long-term Issuer Default Rating (IDR) at 'B'; --Senior unsecured debt at 'B+/RR3'. The Rating Outlook is revised to Stable from Positive. This morning AMD commenced a private offering of senior notes due 2022. Proceeds from the senior notes will be used for general corporate purposes, including debt reduction, payments to GLOBALFOUNDRIES to purchase certain leading edge products from other suppliers, or acquisitions. The revision of Outlook to Stable from Positive reflects Fitch's expectation that AMD's operating performance to remain challenged through at least the near term. Visibility remains limited but demand appears weak across the majority of AMD's end markets, while inventory on hand increased 26 days to 82 days for the recently ended second quarter from 56 at the end of the first quarter. Channel demand for desktops in Europe and China is lower than expected with little promise of near-term recovery for Europe or a resumption of previously more robust growth rates in China. Softness in consumer demand is driving lower notebook sales and intensifying pricing pressures, while graphics processors also are experiencing weakness. Client and server markets appear to be experiencing more pronounced than anticipated pricing pressures. Positively, adoption of AMD's accelerated processing units (APU) products remains solid and the anticipated Windows 8 launch should provide some demand support. Nonetheless, Fitch believes AMD is more vulnerable to cannibalization of desktops and notebooks by tablets over the longer-term, given the company's limited participation. AMD has been able to maintain gross margins near 45%, although Fitch believes this is due in part to sales pressures occurring during the final weeks of the quarter. The resultant inventory additions should further constrain processor shipments in the second half of 2012. On a trailing 12 month (TTM) basis, operating EBITDA is essentially flat at just over $850 million from the comparable last year period. Credit protection measures remain solid for the rating, albeit within a cyclical context. Fitch estimates total leverage (total debt to operating EBITDA) was approximately 2.3x for the TTM ended June 30, 2012 and interest coverage (operating EBITDA to interest expense) was 5.1x. Pro forma for the debt issuance, Fitch believes AMD's liquidity at June 30, 2012 is sufficient and supported by $1.8 billion of cash and marketable securities. The company has no revolving credit facility (RCF). Fitch's expectation for annual free cash flow of up to $500 million also supports the company's liquidity. Pro forma for the debt issuance, total debt at June 30, 2012 was approximately $2.3 billion. Beyond today's $300 million senior notes offering, total debt consisted of: --$485 million of 5.75% senior unsecured convertible notes due 2012; --$580 million of 6% senior unsecured convertible notes due 2015; --$500 million of 8.125% senior unsecured notes due 2017; --$500 million of 7.75% senior unsecured notes due 2020; and --$24 million of capital leases. The ratings continue to reflect AMD's: --Strengthened FCF profile: AMD's significantly lower capital intensity will drive higher annual FCF. AMD's manufacturing assets divestiture reduces capital spending as a percentage of sales to the mid-single digits versus 10% - 30% historically. Fitch Ratings expects AMD's annual FCF to range from breakeven to $500 million through a normalized semiconductor cycle. --AMD's essential role within the microprocessor market as a credible second source supplier. Fitch believes AMD's role as the MPU market's only credible second-source supplier with significant production and design scale provides a floor for market share; and --Slightly lower operating volatility from reduced operating leverage associated with the transformation to a fabless semiconductor maker. Furthermore, AMD's restructuring actions over recent years has reduced fixed costs, resulting in lower operating leverage. AMD's revenues will continue to be highly cyclical, due to the company's competitive position and substantial risks associated with MPU technology life cycles; and Ratings concerns continue to center on: --Intel's ongoing dominance of the microprocessor market, resulting in superior financial flexibility that Fitch believes will enable Intel to maintain its cost and technology leadership over the longer-term; --Significant investment requirements and technology platform and product risk associated with the microprocessor (MPU) market. Fitch expects AMD's R&D will remain in excess of 20% of revenues, which is higher than the industry average of mid- teens; and --AMD's limited market share in servers and nascent participation within smart phones and media tablets, which Fitch believes will drive the majority of microprocessor growth over the intermediate-term. Fitch believes AMD's strong share of developing markets, most notably China, could offset this concentration. The ratings may be upgraded in the event of: --Diversification of foundry suppliers; or --Consistent annual free cash flow at the higher end of Fitch's expected range, supporting the company's technology platforms. Further negative rating actions are unlikely in the absence of sustained material sales declines. AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario. This is given Fitch's estimates that AMD's reorganization value of approximately $1.5 billion exceeds a projected liquidation value. Furthermore, Fitch believes AMD's role as a credible viable alternative microprocessor supplier to Intel also supports reorganization rather than liquidation of AMD in a bankruptcy scenario. To arrive at a reorganization value, Fitch assumes a 5x reorganization multiple, and applies it to its estimate of distressed operating EBITDA of $300 million, which covers estimated annual fixed charges, resulting in an adjusted reorganization value of $1.3 billion after subtracting administrative claims. Based upon these assumptions, Fitch estimates recovery for the estimated $2.2 billion of senior unsecured debt has increased to 51% - 70%, resulting in Recovery Ratings of 'RR3'. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Short-Term Ratings For Corporate Finance' (Nov. 2, 2010); --'Corporate Rating Methodology' (Aug. 13, 2010); --'Recovery Ratings and Notching Criteria For Nonfinancial Corporate Issuers' (Nov. 24, 2009). --'Evaluating Corporate Governance' (Dec. 12, 2007); --'Liquidity Considerations For Corporate Issuers'(June 12, 2007); --'Cash Flow Measures In Corporate Analysis - Amended' (Oct. 12, 2005). Applicable Criteria and Related Research: Corporate Rating Methodology Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers Evaluating Corporate Governance Liquidity Considerations for Corporate Issuers Cash Flow Measures in Corporate Analysis
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