Fitch Affirms AMD's IDR at 'B-'; Outlook Stable

Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Advanced Micro Devices Inc. (NYSE: AMD) at 'B-'. The Rating Outlook is Stable.

Fitch's actions affect approximately $2.6 billion of total debt, including the undrawn portion of the company's revolving credit facility (RCF). A full list of ratings follows the end of this commentary.

The ratings and Outlook reflect Fitch's expectations that despite intermediate-term product momentum and the company's ongoing business transformation, revenue visibility remains limited and annual free cash flow (FCF) generation will be volatile. However, AMD's recent refinancing and restructuring provides headroom for modest operational shortfalls.

Fitch believes AMD will benefit from improving economic conditions and a stabilizing overall PC market, although Intel's latest offerings will continue to dominate the premium and ultra-mobile categories.

In the near term, Fitch expects AMD will face low double-digit revenue decline, driven by weaker GPU sales through its Add-in-Board channel. Over the intermediate-to-long term, Fitch believes new product launches, particularly in the emerging ARM-based semiconductor market, will support low- to mid-single-digit revenue growth.

Over the intermediate term, Fitch expects operating EBITDA margins will remain in the high single-digit range, benefitting from lower fixed costs and the resumption of low single-digit growth following an initial decline in 2015. Fitch believes longer-term profitability will remain volatile, but incremental restructuring is likely should the company's business transformation lag targets.

AMD's recent restructuring efforts have pared down over $200 million in quarterly operating expenses. With restructuring largely complete, Fitch expects further margin appreciation would be predicated on improving revenue growth and positive operating leverage.

Fitch expects mostly flat FCF in 2015 after making a $212 million payment to GLOBALFOUNDRIES (GF) in the first quarter of 2015 for its take-or-pay wafer supply agreement (WSA). Fitch believes AMD's FCF will remain lumpy through the intermediate term, due to revenue volatility and ongoing payments related to the WSA with GF.

Fitch projects AMD will exit 2015 with cash just above its $1 billion target level. Fitch believes AMD may likely use excess cash above its target $1 billion level for tuck-in acquisitions to accelerate its penetration into target markets. AMD lowered its minimum cash requirement to $600 million from $700 million in 2013, due to the company's expectations for enhanced revenue visibility.

Credit protection measures should remain volatile with leverage (total debt-to-operating EBITDA) and interest coverage (operating EBITDA-to-gross interest expense) ranging from low- to mid-single-digits over the next few years. Fitch estimates leverage and interest coverage were 5.1x and 2.5x for the latest 12 months (LTM) ended Dec. 27, 2014, respectively, versus 5.0x and 2.3x for the comparable prior year period.

RATINGS SENSITIVITIES

Negative rating actions could result from:

--Substantial 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.

--Fitch's expectations for EBITDA margins declining to near or below 7% on a sustained basis, driven by increased competition in new and traditional markets, and leading to fewer design wins and forced price cuts.

Fitch believes 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 a shift in AMD's business mix toward 50% or more in new market exposure while maintaining stability (or achieving growth) in the company's legacy markets would be a credit positive. In addition, Fitch believes an upgrade would be predicated on:

--Expectations for total leverage to remain near or below 4.5x;

--Fitch's expectations for sustained operating EBITDA margins above 10%, likely as a result of increased penetration into new markets.

RATINGS DRIVERS:

Ratings are supported by AMD's:

--Role as a credible alternative volume chip supplier for PCs, a large albeit shrinking market, particularly for consumer PCs;

--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;

--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 Dec. 27, 2014, and consisted of:

--$805 million of cash and cash equivalents, around 90% of which was located in the U.S.;

--$235 million of marketable securities;

--A $500 million senior secured RCF due 2018, of which $370 million was available at Dec. 27, 2014.

Total debt was $2.2 billion at Dec. 27, 2014 and consisted primarily of:

--$130 million outstanding on a $500 million senior secured RCF due 2018;

--$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; and

--$500 million of private placement senior notes due 2024.

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 (Enterprise, Embedded, and Semi-Custom, graphics chips, and APUs), and ii) wind down the legacy PC business.

To reorganize the business, Fitch starts with a $306 million post-restructuring operating EBITDA and applies a 4x multiple to arrive at a going concern value of $1.22 billion. Fitch assumes value for the legacy-PC business is de minimis, given expectations that AMD would contribute key IP to the graphics business.

Fitch believes the AMD's post-reorganization RCF would be roughly half of current levels, given Fitch's expectations that a reorganized AMD would be meaningfully smaller in size. The $250 million senior secured RCF would then recover 100%, resulting in an 'RR1' rating. Fitch estimates the approximately $2.1 billion of unsecured claims recover approximately 41%, resulting in recovery ratings of 'RR4'.

Fitch 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979050

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