CHICAGO--(BUSINESS WIRE)--Fitch rates Advanced Micro Devices Inc.'s (NYSE: AMD) private placement of $500 million senior notes due 2019 'CCC/RR4'. A full list of ratings follows the end of this commentary. The ratings affect approximately $2.5 billion of total debt, including the mostly undrawn revolving credit facility (RCF).
This morning, AMD announced it will privately offer $500 million senior notes due 2019 and use the net proceeds to refinance up to $490 million of existing debt. The company will concurrently tender for up to $425 million of 6% convertible senior notes due 2015 and use any remaining net proceeds for up to $200 million of $500 million 8.125% senior notes due 2017.
The ratings continue to reflect Fitch's expectations for negative near-term free cash flow (FCF) and limited top-line visibility, despite solid product momentum heading into 2014. As a result, Fitch believes financial flexibility will remain limited as AMD seeks to increase revenues from non-legacy personal computing (PC) markets to 50% from 20% of total by 2015.
Fitch expects low- to mid-single-digit revenue growth in 2014, driven by strong semi-custom and graphics accelerated processing unit (APU) shipments. AMD's APU is designed into Microsoft's and Sony's newly released game consoles, which significantly outsold previous generations in the launch quarter, and longer product life cycles should add a degree of revenue visibility.
AMD's ability to offset continued weakness in legacy PC markets, which the company forecasts will decline by 10% in 2014, also will depend 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, due to higher revenues and lower fixed costs from completed restructuring. Longer-term profitability will remain volatile, but Fitch believes swift incremental restructuring is likely should the company's business transformation lag targets.
Fitch expects AMD will see modest negative FCF in 2014 after making a $200 million final payment to GLOBALFOUNDRIES (GF) for the exclusivity waiver agreement. As a result, AMD should exit 2014 with cash below $1 billion. Given historical cash usage and risks around AMD's business transformation, Fitch believes financial flexibility is limited through at least the medium term.
Nonetheless, if completed, the refinancing alleviates some near-term liquidity concerns for AMD. AMD strengthened liquidity in 2013 by entering into the $500 million RCF, of which Fitch estimates $445 million was available exiting fiscal 2013 after AMD drew $55 million during the December 2013 quarter. The company also reduced its minimum cash level to $600 million from $700 million, due to management's expectations for increased 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.
Positive rating action could occur if:
--Fitch gains confidence in AMD's ability to maintain cash above $1 billion from organic FCF, which likely would be driven by strong adoption of new product and validation of AMD's business transformation; and
--AMD refinances $530 million of convertible senior notes due May 2015.
Negative rating action could occur if cash balances approach minimum levels, likely from negative FCF resulting from weak adoption of new products.
KEY RATING DRIVERS:
Ratings are supported by AMD's:
--Role as a credible alternative volume chip supplier for PCs, a large albeit shrinking market;
--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;
--Volatile profitability and FCF, due to short technology and product cycles and Intel-driven pricing pressures;
--Significantly lower financial flexibility than that of key competitors, including Intel Corp., NVIDIA Corp. and Qualcomm Inc.
Fitch believes liquidity was sufficient as of Dec. 28, 2013, pro forma for the Dec. 31, 2013 $200 million payment to GF, and consisted of:
--$900 million of cash and cash equivalents, not including $90 million of long-term marketable securities;
--$500 million senior secured RCF due 2018, of which Fitch estimates $445 million was available at Dec. 28, 2013).
Fitch expects modest negative FCF in 2014, including the aforementioned $200 million payment made to GF, and volatile FCF over the longer term.
Pro forma for the successful private placement and tender offers, total debt was $2 billion at Dec. 28, 2013 and consisted primarily of:
--$105 million to $$240 million of 6% senior unsecured convertible notes due 2015, depending upon the tender results;
--$300 million to $435 million of 8.125% senior unsecured notes due 2017, depending upon the tender results;
--$500 million of senior notes due 2019;
--$500 million of 7.75% senior unsecured notes due 2020;
--$500 million of 7.5% senior unsecured notes due 2022.
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.
Fitch expects the fully drawn senior secured RCF, given expectations for receivables levels at default, would recover 100%, resulting in an 'RR1'. The remaining amount available for the senior unsecured debt would be $850 million, which equates to 42% recovery and an 'RR4'.
Fitch currently rates AMD as follows:
--Long-term IDR at 'CCC';
--Senior unsecured debt at 'CCC/RR4'.
--$500 million senior secured RCF at 'B/RR1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage