This morning, AMD announced it will privately offer
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
Nonetheless, if completed, the refinancing alleviates some near-term liquidity concerns for AMD. AMD strengthened liquidity in 2013 by entering into the
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
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
Fitch expects modest negative FCF in 2014, including the aforementioned
Pro forma for the successful private placement and tender offers, total debt was
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
Finally, Fitch assumes AMD sells the dense server business for
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
Fitch currently rates AMD as follows:
--Long-term IDR at 'CCC';
--Senior unsecured debt at 'CCC/RR4'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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