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Rating Action:

Moody's assigns B2 rating to senior unsecured notes of Advanced Micro Devices; outlook stable

02 Jun 2014

$400 million of debt securities affected

New York, June 02, 2014 -- Moody's Investors Service assigned a B2 rating to AMD's proposed $400 million, ten year, senior unsecured note. Net proceeds received from the offering will be used to repurchase AMD's senior unsecured notes due 2017.The outlook is stable.

The stable outlook reflects AMD's prospects for improving operating performance and a better liquidity profile over the next year as the company continues to reorient its business model to address markets beyond its core, legacy personal computer market that include the faster growing, embedded and semi-custom chips, dense server, professional graphics and ultra low power end markets.

RATINGS RATIONALE

The B2 corporate family rating reflects AMD's prospects for improved profitability, free cash flow generation, good liquidity and lower leverage over the intermediate term. AMD is targeting to grow the faster growing segments mentioned above from roughly 30% of revenue in the second half of 2013 (10% in 2012) to 40%-50% of its revenue over the next two years. Driven by design wins and strong demand for Microsoft's Xbox and Sony's PS4 gaming consoles that have multi-year product cycles, we expect revenue growth in semi-custom chips over the intermediate term. With profit margins in mid-teens, as compared to a slight loss for its legacy microprocessor business, we expect continued execution of its product roadmap will lead to better overall profitability for AMD over the intermediate term.

Partially offsetting AMD's improving product mix development is the ongoing weak demand conditions in the personal computer market, particularly in the lower end segments where tablet devices continue to take wallet-share. Combined with our expectations that the market leader, Intel, will remain aggressive, AMD will be challenged to achieve profitability in this segment over the next year after losing $22 million in 2013. Recent design wins for AMD's dense server chips for mega data center applications (with Verizon) are promising, but we expect revenue contribution from this part of the server market will be very modest for AMD over the next 12-18 months as design cycles and customer validation and acceptance for mission critical server components are long.

The company achieved its goal of quarterly operating costs in the third quarter of last year and we expect AMD will sustain quarterly operating costs between $420 million and $450 million in 2014 (excluding intangible amortization and any restructuring charges). With gross margins approximating 35%, the company should achieve modest profitability, positive free cash flow, and improving credit metrics, with adjusted debt to EBITDA below 5x over the next year, as compared to 5.7x at year end 2013.

With $982 million of cash and marketable securities as of March 2014, and our expectation that the company will be modestly free cash flow positive over the next year, AMD has good liquidity. AMD also has access to a $500 million committed, asset-backed, secured revolving credit facility that matures November 2018. After considering the $200 million payment AMD made to its foundry partner (GlobalFoundries) in the first quarter of fiscal 2014, and the traditionally stronger second half, we expect AMD's 2014 year- end cash balances will approximate $1 billion. Management's minimum target cash balance is $600 million. We do not anticipate any other cash payments by AMD to GlobalFoundries outside of normal course wafer supply purchases over the next year. After a $42 million note (unrated) matures May 2015 and after tendering for the $452 million note due 2017, AMD's next debt maturity is not until 2019, when a $600 million note matures.

Considering AMD's improving prospects that lead to the stable outlook, expectations of minimal usage under the secured revolver and that all of AMD's obligations are unsecured other than the revolver, there was an over ride on the Loss Given Default output resulting in the affirmation of the senior unsecured rating at B2.

Rating assigned:

$400 million senior unsecured notes due 2024 at B2 (LGD4-57%)

What Could Change the Rating - Down

The rating could be lowered if AMD's cash and liquid investments are likely to be sustained below $800 million, if the company is unlikely to achieve positive free cash flow over the next year, or if total debt increases other than for temporary working capital needs.

What Could Change the Rating - Up

The rating is not likely to be raised over the near term. Longer term, the rating could be raised if AMD is able to sustain revenue growth with Moody's adjusted EBITDA margins above 10%, while maintaining cash and liquid investments in excess of $1 billion and achieving adjusted debt to EBITDA below 4 times.

The principal methodology used in this rating was Global Semiconductor Industry Methodology published in December 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert P Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B2 rating to senior unsecured notes of Advanced Micro Devices; outlook stable
No Related Data.
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