| SAN FRANCISCO, April 20
SAN FRANCISCO, April 20 Advanced Micro Devices
Inc. AMD.N is facing a cash crunch, but a fateful debt
arrangement last year limits the No. 2 computer chipmaker's
AMD's purchase of graphics chipmaker ATI was funded with
$2.5 billion in debt, which came loaded with restrictions that
would force the company to prepay the loan if it obtains more
debt, issues shares, sells assets or even reduces working
Some investors reckon AMD's only viable option is some sort
of private equity deal -- an option executives welcomed
explicitly for the first time on Thursday after reporting a
surprisingly big $611 million quarterly net loss.
Speculation that AMD could be bought in its entirety by
private equity firms has swirled in recent weeks, though most
industry analysts voice skepticism about that prospect.
Some say it is possible AMD could sell a stake, however, in
exchange for a cash infusion.
"It doesn't make a lot of sense that this is a place where
private equity will be attracted, because it's a high
capital-intensity business and you have a huge competitor,"
Cody Acree, an analyst with Stifel Nicolaus, said on Thursday.
"That's not to say it won't happen or couldn't happen,
because private equity is a little crowded right now, so maybe
they have to go out of their sweet spot," he said.
AMD's latest loss highlighted the tough time it has had
competing with Intel Corp. (INTC.O), a much larger rival that
is winning back business with faster computer processors and
"We still foresee a meaningful degradation of AMD's cash
balances," Citigroup analyst Glen Yeung wrote in a report.
The numbers are grim. Although AMD has nearly $1.2 billion
in cash, it must fund a capacity expansion plan that will cost
it $2 billion this year alone, even after a recent $500 million
reduction aimed at keeping expenses in check.
It also has to buy expensive new production technology to
keep up with Intel's upgrades as well as develop new processors
to compete with more powerful and efficient ones coming out of
its competitor's labs.
Meanwhile, revenue is under pressure amid a price war,
which is not seen getting easier on AMD until it debuts a new
high-end chip called Barcelona later this year.
The usual fund-raising options are less attractive due to
the debt terms AMD agreed to when it bought ATI. A regulatory
filing from last October details conditions under which AMD
must pay back the debt early:
--All net proceeds from any new debt
--All cash proceeds from asset sales over $30 million
--All cash proceeds from sales of AMD's stake in its former
memory chip unit, Spansion Inc. SPSN.O
--Half of the net proceeds from issuing new shares
--Half of excess cash flow
"The execution of the ATI merger was just sort of a
disaster," said Doug Freedman, an analyst with American
Technology Research, adding: "The guys who wrote the debt saw
It's still possible for AMD to issue new debt or shares,
but the size required both to pay off the existing debt and
raise enough cash would weigh on the balance sheet or
drastically dilute the share count, angering investors.
"I got a feeling that anything that gets done would have to
come with unbelievable covenants. Why would we think that they
would get any less restrictive?" Freedman said of any new debt
Still, the rock-bottom interest rates available in today's
debt market could still make that a good option for AMD.
"The debt market is almost free money at this point," Acree
said. "It's Japanese interest rates. Money is there at very
reasonable rates. You can borrow money and get a higher yield
on that money sitting in the bank."