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Rating Action:

Moody's lower ratings of Advanced Micro Devices (CFR to B1); under review for downgrade

Global Credit Research - 19 Oct 2012

Approximately $1.5 billion of debt securities affected

New York, October 19, 2012 -- Moody's Investors Service lowered Advanced Micro Devices' ("AMD") corporate family rating to B1 from Ba3, and the ratings on the senior unsecured notes to B1 from Ba3. The ratings were also placed under review for further downgrade. The speculative grade liquidity rating was lowered to SGL-2 from SGL-1.

The downgrade of the corporate family rating reflects prospects for significantly weaker than expected operating performance over the next year. The "increasingly challenging macro environment, weak demand conditions in the personal computer space, particularly among consumers and in the lower end segments where tablet devices continue to take wallet-share, are expected to persist well into 2013", said Moody's Richard Lane.

AMD is reorienting its business model and implementing a cost realignment program that, with $450 million of quarterly operating costs, could achieve breakeven operating profit at $1.3 billion in sales. With our forecast $1.15 billion of revenue in the December quarter, followed by typically lower sequential revenue in the first fiscal quarter and flat second quarter revenue, we believe AMD will be challenged to achieve quarterly breakeven operating profit until at least one year from now.

Driven by the outlook for operating losses, we expect adjusted debt to EBITDA could double over the next year from approximately 4.0 times as of September 2012 (2.7 times at June 2012).

As of September 2012, AMD had nearly $1.5 billion of cash and marketable securities. AMD does not maintain a committed revolving credit facility. We now expect AMD will consume some cash over the next year. This view is driven by projected operational losses, cash payments of $225 million to AMD's foundry partner (Global Foundries) in December related to a previously negotiated wafer supply agreement, and approximately $80 million in cash outflows related to restructuring activities (headcount reduction) over the next two quarters. AMD's next debt maturity is a $580 million note (unrated) due May 2015.

RATINGS RATIONALE

The review will focus on AMD's prospects to reorient its business to address markets beyond its core, legacy personal computer market to the faster growing server, embedded, and ultra low power segments. AMD is targeting to grow the latter segments from roughly 15% of revenue presently to 40%-50% of its revenue over time.

Embedded computation for the gaming, industrial, and communications currently makes up about 5% of AMD's revenue, and management outlined a goal to increase that to about 20% by the end of 2013. While AMD has key design wins in the embedded space that we believe makes this target reasonable, we are more skeptical of AMD's ability to drive server materially higher over the near term due to stiff competition from Intel and long design cycles for mission critical servers. The review will consider the time frame and financial implications of AMD's plans to use third party processor cores in future high-end server products to complement its Sea-Micro server fabric. We will also assess AMD's prospects to compete in the ultra low power tablet market where incumbent producers of ARM-based processors have low power advantages.

In addition to management's strategic reorientation, we will also assess the ability to reduce AMD's operational cost structure ($80 million in fourth quarter restructuring charges followed by additional undisclosed restructuring charges next year) without diminishing the ability to consistently innovate. An additional element of the ratings review will address AMD's future wafer supply agreement with Global Foundries, including the existing take-or-pay contract under which AMD is currently scheduled to pay $500 million in the fourth quarter.

In addition, Moody's is adding the LGD for the bonds due in 2020. The LGD was previously missing due to an internal administrative error. An LGD of LGD4-53 was assigned on July 26 2010 when the bonds were first rated and was changed to LGD4-54 on August 6 2012.

Ratings downgraded:

Corporate family rating to B1 from Ba3

Probability of default rating to B1 from Ba3

$500 million senior unsecured notes due 2017 to B1 (LGD4-54%) from Ba3 (LGD4-54%)

$500 million senior unsecured notes due 2020 to B1 (LGD4-54%)from Ba3 (LGD4-54%)

$500 million senior unsecured notes due 2022 to B1 (LGD4-54%)from Ba3 (LGD4-54%)

Speculative grade liquidity rating to SGL-2 from SGL-1

The principal methodology used in rating Advanced Micro Devices was the Global Semiconductor Industry Methodology published in November 2009. 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

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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 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 lower ratings of Advanced Micro Devices (CFR to B1); under review for downgrade
No Related Data.

 

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