Fitch has changed the Rating Outlook on Advanced Micro Devices Inc. (AMD) to Negative and affirmed the following ratings:
--Issuer Default Rating (IDR) at 'B'; and
--Senior Secured Term Loan B Facility at 'BB-/RR2'.
Fitch has downgraded the 7.75% senior notes due 2014 to 'CCC+/RR6' from 'BB-/RR2', due to potential loss of security and lower recovery prospects, as the indenture and collateral trust agreement permit AMD to remove the collateral securing this tranche of debt.
In addition, Fitch expects to rate AMD's $2.0 billion 6% senior unsecured convertible notes due 2015, issued today under Rule 144A, at 'CCC+/RR6'. Initial purchasers also have a 30 day option to purchase up to $200 million of additional notes. The company plans to use the net proceeds to repay at least $500 million of outstanding Term Loan B balances, fund the purchase of a capped call option intended to limit potential dilution, and for general corporate purposes.
Fitch's actions affect approximately $5.3 billion of pro forma total debt, assuming AMD reduces $500 million of the Term Loan B.
The revision of the Outlook reflects Fitch's expectations that AMD's operating performance will remain challenged over the intermediate-term. AMD's profitability continues to be pressured by meaningfully lower than anticipated microprocessor (MPU) unit shipments and intensified competitive pressure from Intel Corp. (Intel), driven by a combination of Intel's manufacturing advantage and strong operating momentum following its product portfolio refresh in the third quarter of 2006. As a result, AMD's revenues declined more than 30% sequentially and gross profits dropped 46% to a Fitch-estimated 31% for the seasonally weak first quarter ended March 31, 2007 from 40% for the fourth quarter of 2006. While AMD's planned cost reduction efforts (headcount reductions, facility sales, and lower discretionary spending) should yield modestly positive results throughout the year, Fitch believes solid market acceptance of AMD's refreshed product portfolio in the second half of 2007 and realization of strong unit shipment from recent design wins with previously under-penetrated original equipment manufacturers will be critical to the company ability to internally fund a significant portion of its substantial ongoing capital spending and investments in research and development (R&D). Therefore, a lack of meaningful improvement in profitability and additional market share losses could result in negative rating actions.
AMD's liquidity is adequate and has improved from the $2.0 senior unsecured convertible debt placement, which should increase cash balances to approximately $2.7 billion from $1.2 billion as of March 31, 2007 (pro forma for the anticipated $500 million reduction in Term Loan B balances). Fitch believes AMD's plans to reduce capital expenditures by $500 million in 2007, monetize its remaining investment in Spansion Inc. (Spansion), sell 200mm manufacturing equipment, and collect on grants and subsidies associated with its investments in Dresden, Germany throughout the year will enable AMD to maintain adequate liquidity through the near-term. Longer-term, while recognizing the company's need to continue upgrading its manufacturing capabilities to compete with Intel's lower unit cost structure and reliably serve a growing OEM customer base, Fitch believes the company is likely to curtail capital spending further, potentially by pursuing a more asset-light manufacturing model.
Despite the aforementioned revenue decline during the first quarter and a likely non-recurring significant reduction in accounts receivable balances, AMD has experienced more rapid than anticipated erosion of financial flexibility as the company burned approximately $375 million cash for the quarter. While Fitch continues to anticipate negative free cash flow for 2007, AMD's failure to curb significant cash burn over the next several quarters could result in further negative rating actions.
The Recovery Ratings continue to reflect Fitch's belief that AMD would be reorganized rather than liquidated in a bankruptcy scenario, given Fitch's estimates that AMD's current reorganization value of $2.3 billion is meaningfully higher than its projected liquidation value of $1.2 billion. In estimating reorganization, Fitch assumes a 5 times (x) multiple and 50% stress to AMD's EBITDA for the latest 12 months (LTM) ended March 31, 2007 of approximately $933 million (pro forma for the ATI acquisition). Fitch arrives at an adjusted reorganization value of $2.0 billion after subtracting administrative and cooperative claims. Based upon these assumptions, the senior secured debt, including the $1.7 billion Term Loan B (pro forma for the assumed repayment of $500 million) recovers approximately 68%. While this results in an 'RR3' (51-70% recovery) rating in Fitch's recovery model, Fitch considers the potential for incremental Term Loan reductions and improved profitability, thereby increasing adjusted reorganization value going forward and, therefore, maintains an 'RR2' rating on the Term Loan B. Minimal recovery would be available for the senior unsecured debt, including the $390 million 7.75% senior notes due 2014. As a result, the estimated 5% recovery results in an 'RR6' rating for all of the senior unsecured debt.
The ratings continue to be supported by AMD's:
--meaningfully higher share of the MPU market, which Fitch believes remains at approximately 20% versus less than 10% historically;
--expectations for the ability to provide platform products to the marketplace and additional revenue growth opportunities from the acquisition of ATI Technologies (ATI); and
--strengthened and expanding relationships with original equipment manufacturers (OEM), including Dell Inc. (rated 'A/F1' on Rating Watch Negative by Fitch).
Ratings concerns center on:
--significant product technology risk associated with the MPU market, potentially resulting in meaningful share shifts between AMD and Intel going forward, as well as continued cyclical operating results;
--Intel's meaningful manufacturing technology advantage over AMD, driven by capital expenditures consistently in excess of $5 billion, forcing AMD to aggressively upgrade manufacturing facilities; and
--AMD's limited financial flexibility due to high debt levels coupled with significant spending requirements on capital equipment, R&D investments, and marketing initiatives.
Pro forma for the aforementioned debt issuance and anticipated reduction of the Term Loan B, total debt was $5.3 billion at March 31, 2007 and consisted of:
i) $893 million Fab 36 Secured Term Loan due 2011
ii) $1.7 billion senior secured Term Loan B facility due 2013;
iii) $2.0 billion senior unsecured convertible notes due 2015;
iv) $390 million senior unsecured notes due 2014; and
v) other debt, including capital leases, of approximately $320 million.
Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at www.fitchratings.com/recovery
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.