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TEXT - S&P cuts Advanced Micro Devices rating to B
January 8, 2013 / 3:55 PM / 5 years ago

TEXT - S&P cuts Advanced Micro Devices rating to B

Overview
     -- Sunnyvale, Calif.-based Advanced Micro Devices Inc. (AMD)
amended its wafer supply agreement with GLOBALFOUNDRIES in December 2012, which
reduced burdensome prior minimum purchase commitments, though we expect AMD's
negative free cash flow to continue in 2013.  
     -- We are lowering our corporate credit and senior unsecured issue 
ratings on AMD to 'B' from 'BB-', and removing the ratings from CreditWatch 
with Negative implications.
     -- The outlook is stable. Despite our expectation for AMD's leverage to 
climb above 7x over the coming year, we believe the company has the 
opportunity to stabilize its operating performance in 2013 through product 
introductions, potential embedded product design wins, and recently announced 
restructuring initiatives and has sufficient liquidity to bridge this period 
of expected weak earnings.  

Rating Action
On Jan. 8, 2013, Standard & Poor's Rating Services lowered its corporate 
credit and senior unsecured ratings on Advanced Micro Devices Inc. (AMD) to 
'B' from 'BB-'. At the same time, we removed the ratings from CreditWatch, 
where we had placed them with negative implications on Oct. 12, 2012. The 
downgrade reflects our expectation for continued revenue and earnings declines 
resulting in leverage exceeding 7x over the coming year due to weak PC 
industry demand prospects and intense competition from industry peers, 
including Intel.

Rationale
The 'B' corporate credit rating reflects AMD's "vulnerable" business risk 
profile, characterized by intense competition from  Intel Corp., as well as 
prospects for tablet computing to continue to subdue PC industry growth and 
AMD's earnings over the coming year, resulting in leverage expected to exceed 
7x and our assessment of AMD's financial risk profile as "highly leveraged." 
The ratings also reflect the company's "adequate" liquidity. Our management 
and governance assessment is "fair."

AMD faces challenges from ARM-based competitors, which are currently designing 
products for fast-growing tablet and smartphone markets. We expect smartphone 
and computing tablet growth to continue to reduce industry demand for 
x86-based (a family of computing instruction set architectures) computing and 
to support cloud-based server demand, constraining AMD's prospects for revenue 
and earnings over the coming year. We also expect AMD's revenue performance to 
remain constrained by competition from industry leading Intel. 

Our financial risk profile for AMD reflects the company's prospects for 
increasing leverage over 7x over 2013, from under 3x in 2011. Considering 
industry competition, we still expect that AMD has an opportunity to reduce 
leverage below 5x subsequent to 2014, though we expect the company to face 
execution challenges to increase its presence in new markets, including analog 
product markets, absent growth to its overall research and development (R&D) 
spending. We note that AMD announced in October 2012 its plan to reduce its 
quarterly operating expenses, including R&D, to $450 million by third-quarter 
2013, representing an approximate 25% reduction from 2012 first-quarter levels.

Liquidity
AMD maintains adequate liquidity from internal sources. The company doesn't 
have a revolving credit facility at this point. Cash amounted to $1.48 billion 
on Sept. 29, 2012. We expect that payments to GLOBALFOUNDRIES related to the 
December 2012 contract amendment and severance payments related to the 
company's 15% workforce reduction announced in October 2012 will contribute to 
continuing negative free cash flow in 2013. Despite AMD's negative free cash 
flow prospects during 2013, we expect AMD to maintain cash above its minimum 
target of $700 million over the coming 12 months without the need for 
additional debt, other than sales leaseback proceeds anticipated to amount to 
between $150 million and $200 million. We expect coverage of liquidity uses by 
sources to exceed 1.2x for the next 12 to 24 months and believe that net 
sources would be positive over the coming 12 months, even with a 15% to 20% 
decline in EBITDA. 

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
AMD, to be published as soon as possible on RatingsDirect following this 
release. 

Outlook
The outlook is stable. Despite our expectation for AMD's leverage to climb 
above 7x over the coming year, we believe the company has an opportunity to 
stabilize its operating performance in 2013 and has liquidity sufficient to 
bridge this period of weak performance. Improvements should come through 
product introductions, potential embedded product design wins, and recently 
announced restructuring initiatives. A downgrade could result from a number of 
developments, including protracted low demand, further 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 were likely to fall below $700 million or 
prospects to reduce leverage below 7x in 2014 diminish. Considering AMD's 
competitive challenges, an upgrade is unlikely at present. 
Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Downgraded
                                        To                 From
Advanced Micro Devices Inc.
 Corporate Credit Rating                B/Stable/--        BB-/Watch Neg/--
 Senior Unsecured                       B                  BB-/Watch Neg
   Recovery Rating                      3                  3

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