TEXT - Fitch cuts Advanced Micro Devices issuer default rating
Jan 30 - Fitch Ratings has downgraded the following ratings for Advanced Micro Devices Inc.'s (NYSE: AMD): --Long-term IDR to 'CCC' from 'B'; --Senior unsecured debt to 'CCC/RR4' from 'B/RR4'. Fitch's actions affect approximately $2.1 billion of total debt. The ratings reflect Fitch's expectations that negative free cash flow (FCF) in 2013 will drive cash below AMD's target level and potentially approach the company's minimum operating level. Beyond the near-term, Fitch believes a strong end market recovery and adoption of AMD's new products will be required to preserve cash during the company's multi-year transformation. Fitch expects negative revenue growth in the mid- to high-teens for 2013, driven by weak consumer spending, robust tablet penetration and lingering excess channel inventory anticipated for the first half of the year. Revenue growth could turn positive in the back half of 2013, assuming strong sales of AMD's new products. Negative revenue growth will drive profitability lower in 2013, despite restructuring actions expected to reduce quarterly operating expenses to $450 million by the September 2013 quarter. Fitch expects negative FCF of $250 million to $450 million in 2013 from lower profitability levels and inventory builds related to new product ramps. AMD's cash usage will be amplified by cash payments to GLOBALFOUNDRIES (GF) for amendments to the wafer supply agreement (WSA), including $215 million in fiscal 2013 and $200 million at the beginning of fiscal 2014. These cash outflows could be partially offset by proceeds from AMD's proposed office building sale-and-leaseback transaction. AMD is planning first half of 2013 launches of system-on-a-chip (SoC) accelerated processors for ultra-low power mobility and tablet products and solid revenue growth in the second of 2013 from ramps of a broad set of design wins. Delays to these launches, the expected market recovery, or product sales ramps would exacerbate Fitch forecasts. Credit protection measures will remain volatile, due to variations in profitability. Fitch estimates total leverage was 4.2x for 2012 but may approach 10x in 2013. Fitch estimates interest coverage was 2.8x for 2012 but could fall to 1x in 2013. AMD's transformation targets higher-growth markets, including ultra-low-power mobility, high-density servers and semi-custom embedded products. Given AMD's traditional PC markets represent the vast majority of sales, achieving the company's target of 40%-50% of sales from higher-growth markets will require a number of years. Fitch believes liquidity was sufficient as of Dec. 29, 2012, and consisted of $1.18 billion of cash and cash equivalents, including $181 million of long-term marketable securities. Fitch expects negative FCF of $250 million to $450 million for the current year, pressuring liquidity by the end 2013. The company has a stated target cash level of $1.1 billion and minimum operating cash level of $700 million. Total debt was $2.1 billion at Dec. 29, 2012 and consisted of: --$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; --$500 million of 7.5% senior unsecured notes due 2022; --Approximately $25 million of capital leases. AMD's ratings continue to be supported by: --Low capital intensity as a fabless semiconductor maker, resulting in a stronger FCF profile; --Reduced revenue breakeven profitability, pro forma for the completion of current restructuring initiatives; --The company's role as the only current viable alternative microprocessor supplier to Intel, although Fitch expects new entrants in certain markets over the intermediate term. Fitch's concerns center on: --Limited financial flexibility, given cash usage trends; --AMD's modest share of the overall PC market and limited share in rapidly growing small-form factor mobility products; --High R&D intensity as a fabless semiconductor maker. Further negative rating actions could be taken if the penetration of new APU products is lackluster, resulting in revenue declines and cash usage beyond 2013. Positive rating actions could occur if: --FCF exceeds the upper end of Fitch's base case range; --Strong adoption of new products, portending solid revenue growth and positive FCF in 2014. 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 billion exceeds a projected liquidation value of $682 million. To arrive at a reorganization value, Fitch assumes a 4x reorganization multiple and applies it to its estimate of distressed operating EBITDA of $260 million, which covers estimated annual fixed charges, resulting in an adjusted reorganization value of $939 million after subtracting administrative claims. Fitch estimates the approximately $2.1 billion of unsecured claims recover approximately 45%, resulting in an RR of 'RR4'.
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