CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Advanced Micro Devices Inc. (NYSE: AMD), including the long-term Issuer Default Rating (IDR), at 'B-'. Fitch also revised the Rating Outlook to Negative from Stable.
Fitch's actions affect $2.6 billion of total debt, including the asset backed credit facility (ABL). A full list of ratings follows at the end of this commentary.
The ratings and Outlook reflect Fitch's expectations for a weaker than previously anticipated operating performance through at least the near term, which could result in incremental borrowing to support negative free cash flow (FCF).
Persistently weak personal computer (PC) demand, excess channel inventory and foreign currency headwinds will drive substantial weakness in at least the first half of 2015. For the full year, Fitch forecasts negative 15%-20% revenue growth, despite expectations for solid Windows 10 adoption, strong seasonal gaming console demand, and rebalanced channel inventory in the back half of 2015.
Fitch expects operating EBITDA margin will strengthen but remain in the mid-single digits, driven by sales mix, lower revenues and essentially fixed research and development (R&D) spending. Fitch believes profit margin contraction may be exacerbated in 2015 by aggressive pricing for discrete graphics processors to clear excess inventory.
Cash usage continues and Fitch estimates negative FCF could exceed $200 million in 2015, driven by lower revenue and profitability. Given AMD reported negative $195 million of FCF in the quarter ended March 27, 2015, Fitch's estimate incorporates the company ramping up sales in the second half of the year and ending 2015 with flat inventory levels.
Negative rating actions could result from Fitch's expectations for:
--Sustained negative revenue growth in the Enterprise, Embedded and Semi-Custom segment (EE&CS), indicating a diminished technology portfolio and undermining AMD's transformation away from legacy PC businesses; or
--Sustained 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.
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. Fitch believes an upgrade would be predicated on Fitch's expectations for total leverage to remain near or below 4.5x from structurally stronger operating EBITDA.
Fitch expects continued revenue declines for the Computing and Graphics segment (C&G) through the intermediate term. In the near term, AMD may partially offset weak PC demand with share gains in discrete graphics processing units (GPUs).
Of more concern is the potential for further revenue declines in EE&SC, which includes businesses critical to AMD's transformation away from legacy PC markets. The company should benefit from next-generation APU and GPU products shipping in the current quarter and semi-customer server ramps in the second half of 2016.
Lower profitability and higher debt levels from ABL borrowings would weaken credit protection measures. Fitch expects total leverage (total debt-to-operating EBITDA) will spike to the mid-teens in 2015 and fall to the high single digits through the forecast period. Interest coverage (operating EBITDA-to-interest expense) should remain near 1x for 2015. Fitch estimates total leverage and interest coverage of 12x and 1.1x, respectively, for the latest 12 months (LTM) ended March 27, 2015.
KEY RATING DRIVERS:
Ratings are supported by AMD's:
--Solid intellectual property (IP) for APUs and GPUs, which underpin AMD's business transformation;
--Role as a credible alternative chip supplier for PCs, a large albeit shrinking market, particularly for consumer PCs;
--Fabless manufacturing model, relieving the need for 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's 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 27, 2015, and consisted of:
--$677 million of cash and cash equivalents, around 90% of which was located in the U.S.;
--$229 million of marketable securities;
--A $500 million senior secured revolving credit facility (RCF) due 2019, of which $312 million was available at March 27, 2015.
AMD's amended and restated credit agreement, which extends the facility's expiration to 2019 from 2018, reduces pricing and eliminates a minimum domestic cash covenant.
Total debt was $2.2 billion at March 27, 2015 and consisted primarily of:
--$188 million outstanding on a $500 million senior secured RCF due 2019;
--$42 million of 6% senior unsecured convertible notes due 2015;
--$600 million of 6.75% senior notes due 2019;
--$450 million of 7.75% senior unsecured notes due 2020;
--$475 million of 7.5% senior unsecured notes due 2022;
--$500 million of 7% senior notes due 2024;
--$10 million of capital leases.
AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario. To arrive at a reorganization value, Fitch assumes a 5x reorganization multiple and applies it to its estimate for post-restructuring operating EBITDA of $300 million.
This reflects Fitch's belief that AMD would shed exposure to legacy PC markets within the context of reorganization and focus on higher-growth client APUs, semi-custom servers, high-end graphics and gaming-related royalties. This results in an adjusted reorganization value of $1.5 billion after subtracting administrative claims, which exceeds a projected liquidation value of $784 million.
Fitch estimates AMD's post-reorganization ABL would be fully drawn at reorganization, given still sizeable receivables, inventory and PP&E. The $500 million senior secured ABL would then recover 100%, resulting in an 'RR1' rating. Fitch estimates the approximately $2.1 billion of unsecured claims recover approximately 41%, resulting in an RR of 'RR4'.
--Negative 15%-20% revenue growth, driven by weak personal computer (PC) demand, excess channel inventory and foreign currency headwinds in at least the first half of 2015.
--Solid Windows 10 adoption, strong seasonal gaming console demand, and rebalanced channel inventory drive higher revenue growth in the second half of 2015.
--Operating EBITDA margin will remain in the mid-single digits, driven by sales mix, lower revenues and fixed R&D.
--Negative FCF of roughly $200 million in 2015, driven by lower revenue and profitability, which assumes the company clear excess inventory in the current year.
--Credit protection measures remain weak through the forecast period, driven by lower profitability and higher debt levels.
Fitch has affirmed AMD's ratings as follows:
--Long-term IDR at 'B-';
--Senior secured RCF at 'BB-/RR1';
--Senior unsecured debt at 'B-/RR4'.
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