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Fitch Upgrades AMD's IDR to 'B-'; Outlook Stable
June 3, 2014 / 8:11 PM / 3 years ago

Fitch Upgrades AMD's IDR to 'B-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 03 (Fitch) Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) for Advanced Micro Devices Inc. (NYSE: AMD) to 'B-' from 'CCC'. Fitch has also rated AMD's private placement of $500 million senior notes due 2024 at 'B-/RR4'. The Rating Outlook is Stable. A full list of ratings follows the end of this commentary. Fitch's actions affect approximately $2.5 billion of total debt, including the revolving credit facility (RCF). The upgrades primarily reflect AMD's improved financial flexibility from recent refinancing activity, which extends meaningful debt maturities until 2019. AMD's refinancing activity provides incremental flexibility to absorb any operational shortfalls during its ongoing business transformation. The company privately placed $500 million of senior unsecured notes due 2024 and will use net proceeds to repurchase $423 million of 8.125% of senior notes due 2017. This follows AMD's private placement on Feb. 26, 2014 of $600 million of 6.75% senior notes due 2019 and subsequent repurchase of $487 million of 6% convertible notes due 2015 during the first quarter of 2014 (1Q'14). The ratings and Outlook continue to incorporate Fitch's belief that, despite near-term product momentum and the company's ongoing business transformation, revenue visibility remains limited and annual free cash flow (FCF) generation uneven. AMD seeks to increase revenues from non-legacy personal computing (PC) markets to 50% from 20% of total revenue by 2015. AMD should resume positive revenue growth in the low- to mid-single digits in 2014, driven by strong graphics accelerated processing unit (APU) shipments. AMD's APU is designed into Microsoft's and Sony's newly released game consoles, which have significantly outsold previous generations to date and should add a degree of revenue visibility given longer product life-cycles. However, AMD's ability to offset continued weakness in legacy PC markets, which the company forecasts will decline by 10% in 2014, also depends on strong shipments of next-generation APUs for desktops, as well as solid adoption of just launched low power APUs for tablets and ultra-thin notebooks and discrete and professional graphics processing units (GPU). Fitch expects operating EBITDA margin will expand to a high single-digit range in 2014 after bottoming in 2013, as a result of operating leverage and lower fixed costs from completed restructuring. Longer-term profitability will remain volatile but Fitch believes incremental restructuring is likely should the company's business transformation lag targets. Fitch expects modest negative-to-flat FCF in 2014 after the company's $200 million final payment to GLOBALFOUNDRIES in 1Q'14 for the exclusivity waiver agreement. As a result, AMD should exit 2014 with cash of just under $1 billion. AMD lowered its minimum cash requirement to $600 million from $700 million in 2013, due to the company's expectations for enhanced revenue visibility. Credit protection measures should remain volatile with total debt-to-operating EBITDA and operating EBITDA-to-gross interest expense ranging from low- to mid-single digits over the next few years. Fitch estimates total debt-to-operating EBITDA and operating EBITDA-to-gross interest expense were 4.3x and 2.8x for the latest 12 months (LTM) ended March 31, 2014, respectively, versus 6.7x and less than 1x for the comparable prior year period. RATINGS SENSITIVITIES Fitch believes incremental positive rating actions could result from enhanced revenue visibility and expectations for consistent FCF through the cycle, both the result of AMD's successful business transformation. Negative rating actions could result from substantial FCF usage, resulting in cash balances declining toward the $600 million minimum level. Fitch believes this could be due to greater than expected average selling price (ASP) erosion for graphics APUs or stalled traction in semi-custom servers and non-legacy PC businesses. KEY RATINGS DRIVERS: Ratings are supported by AMD's: --Role as a credible alternative volume chip supplier for PCs, a large albeit shrinking market, particularly for consumer PCs; --Significant intellectual property (IP) for APUs and GPUs, which underpin AMD's business transformation; --Outsourced manufacturing model, relieving the company from significant investments in leading-edge manufacturing capabilities and strengthening FCF. Ratings concerns include AMD's: --Lack of revenue visibility, which should improve if the company's business transformation is successful; --Challenges for foundry partners to keep pace with Intel Corp.'s (Intel) leading-edge manufacturing capabilities, potentially resulting in structural cost and performance disadvantages for future products; --Volatile profitability and FCF, due to mostly short technology and product cycles and Intel-driven pricing pressures; --Significantly less financial flexibility than that of key competitors, including Intel, NVIDIA and Qualcomm. Fitch believes liquidity was sufficient as of March 31, 2014 and consisted of: --$902 million of cash and cash equivalents (excludes $80 million of long-term marketable securities), the vast majority of which was located in the U.S.; --$500 million senior secured RCF due 2018, of which $445 million was available at March 31, 2014. Pro forma for the private placement and repurchase of $500 million of 8.125% senior notes due 2017, total debt was $2.1 billion at March 31, 2014 and consisted primarily of: --$42 million of 6% senior unsecured convertible notes due 2015; --$600 million of 6.75% senior notes due 2019; --$500 million of 7.75% senior unsecured notes due 2020; --$500 million of 7.5% senior unsecured notes due 2022; and --$500 million of private placement senior notes due 2024. AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized as a going concern rather than liquidated in a bankruptcy scenario. To arrive at a going concern value, Fitch believes AMD would: i) reorganize businesses serving target markets (graphics chips and APUs), ii) wind down the legacy PC business, and iii) sell the dense server business. To reorganize the graphics business, Fitch starts with a $250 million post-restructuring operating EBITDA and applies a 5x multiple (up from 4x due to positive product momentum and separation from the legacy PC business) to arrive at a going concern value of $1.25 billion. Fitch assumes value for the legacy-PC business is de minimis, given expectations that AMD would contribute key IP to the graphics business. Finally, Fitch assumes AMD sells the dense server business for $250 million, which represents a discount to AMD's $300 million purchase of SeaMicro in 2012. Adding the $1.25 billion of going-concern value for the graphics business and $250 million of proceeds leaves $1.35 billion after subtracting 10% for administrative claims. The fully drawn RCF would likely recover 100%, given Fitch's expectations for receivables levels at default, resulting in an 'RR1'. The senior unsecured debt would recover $850 million, or 42%, equating to an 'RR4'. Fitch upgraded AMD's ratings as follows: --Long-term IDR to 'B-' from 'CCC'; --Senior secured RCF to 'BB-/RR1' from 'B/RR1'; --Senior unsecured debt to 'B-/RR4' from 'CCC/RR4'. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc., 70 W. Madison Street Chicago, IL 60602 Secondary Analyst John M. Witt, CFA Senior Director +1-212-908-0673 Committee Chairman Rolando Larrondo +1-212-908-9189 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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