Moody's Lifts Outlook on Advanced Micro Devices (AMD) to Positive; Ratings Affirmed
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Moody's Investors Service, ("Moody's") affirms Advanced Micro Devices, Inc.'s (Nasdaq: AMD) Caa1 corporate family rating and the Caa2 rating on the senior unsecured notes, and revised the rating outlook to positive from negative. The speculative grade liquidity rating is upgraded to SGL-2 from SGL-3.
The positive outlook reflects AMD's prospects for improved operating performance and cash generation as well as the improved product portfolio enabling the company to compete in the current discrete GPUs (graphics processing unit), APUs (application process units), x86 and ARM CPUs (central processing unit) market. Although we expect ongoing revenue declines and operating losses in its PC-related business (microprocessors and graphics chips), the growing EESC (enterprise, embedded, and semi-custom) business supported by the reported design wins, we project break even to modest profitability beginning in the second half of 2016.
AMD's proposed equity offering and senior unsecured convertible debt issuance, with proceeds used to repay debt, will also bolster the company's balance sheet, reduce interest expense, and improve AMD's term structure of debt. As part of the transaction, Moody's expects the company will significantly reduce a combination of borrowings under its asset based lending facility as well as senior unsecured notes.
The Caa1 corporate family rating reflects AMD's challenges in achieving and sustaining profitability across its product portfolio where it competes with stronger players such as Intel and Nvidia. Despite these ongoing competitive challenges, AMD has made progress over the last few quarters in terms of design wins and market share gains, which we believe will contribute to improved performance over the next year, including operating profitability and modestly positive free cash flow. We project steady to slightly higher revenue in 2016 and 2017 with operating profit developing over the next year as profitable growth in the semi-custom business offsets the moderating losses in the company's personal computer related microprocessor and graphics chip segment. Given the previously reported three large design wins of approximately $1.5 billion over three to four years, it should enable the company to modestly build revenue beginning in the second half of 2016 and offset losses in the rest of its business. AMD has good liquidity with $957 million of cash and marketable securities as of June 25, 2016 (88% held domestically).
AMD's SGL-2 rating reflects its improving liquidity position. AMD reported $957 million of cash and marketable securities as of June 25, 2016 (88% held domestically), up from $785 million at December 26, 2015. The increase in cash is primarily contributed by the proceeds of approximately $351 million from the sale of the equity interests in the ATMP JV, and the formation of the China JV with Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), in which AMD licensed certain IP to the JV for approximately $293 million in license fees over several years. AMD also maintains a $500 million asset based revolving credit facility (ABL) under which $226 million was drawn as of June 25, 2016, but will be fully repaid following the proposed convertible debt issuance. With cash balances, access to the ABL, and no material debt maturities until May 2019, AMD has solid liquidity. As part of the Wafer Supply Agreement with GLOBALFOUNDRIES announced on August 31, 2016, AMD will make four $25 million payments beginning in the fourth quarter of 2016 through third quarter of 2017. We expect AMD's cash balance in the first half of 2017 to be at least $900 million.
Corporate family rating at Caa1
Probability of default rating at Caa1-PD
$600 million senior unsecured notes due 2019 at Caa2 (LGD4)
$450 million senior unsecured notes due 2020 at Caa2 (LGD4)
$475 million senior unsecured notes due 2022 at Caa2 (LGD4)
$500 million senior unsecured notes due 2024 at Caa2 (LGD4)
Speculative grade liquidity rating to SGL-2 from SGL-3
Changed to positive from negative
The rating could be upgraded if AMD is able to sustain revenue growth with Moody's adjusted operating margins above 4%, while achieving positive free cash flow and maintaining cash and liquid investments in excess of $1 billion.
The rating could be downgraded if AMD's cash and liquid investments are likely to drop below $600 million (without raising additional debt) or if the company is unlikely to achieve breakeven operating profit and free cash flow over the next year.
The principal methodology used in these ratings was Semiconductor Industry Methodology published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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