S&P Affirms Ratings, Outlook on Advanced Micro Devices (AMD); Rates New Senior Conv. Notes

Highlights:

• U.S. semiconductor company Advanced Micro Devices Inc. (AMD) has announced its intention to begin a public offering of approximately $600 million in common stock and to issue approximately $450 million in senior unsecured convertible notes due in 2026.
• AMD intends to use net proceeds of about $1.02 billion to repay borrowings under its credit facility and portions of its outstanding senior notes.
• We are affirming our 'CCC+' corporate credit rating on AMD.
• We are assigning our 'CCC' rating to the senior unsecured convertible notes and '5' recovery rating, indicating our expectation of modest recovery (in the lower half of the 10%-30% range) under our default scenario. We are also affirming our 'CCC' senior unsecured issue-level rating.
• The stable rating outlook reflects AMD's moderating weakness and improving prospects to stabilize its operating performance. It also considers AMD's vulnerable business profile, which is susceptible to ongoing competitive pressures that could reverse its recent improvement in the weak PC microprocessor market, as well as new product markets.

S&P Global Ratings today affirmed its 'CCC+' corporate credit rating on Advanced Micro Devices Inc. (Nasdaq: AMD). The outlook is stable. In addition, we assigned our 'CCC' issue-level rating to the company's senior unsecured convertible notes due in 2026.

We also affirmed our 'CCC' senior unsecured issue level rating. The senior unsecured recovery rating remains '5', indicating our expectation of modest recovery (in the lower half of the 10%-30% range) in the event of a payment default.

The ratings reflect AMD's vulnerable business risk profile: weak PC industry conditions, intense competition from Intel, and challenges to grow in targeted enterprise, and embedded and semi-custom product markets to offset PC business declines. It also reflects our expectation that AMD will experience a gradual return to revenue growth, supported by new product introductions in 2016 and 2017. "Considering mid-year 2016 new product introductions and its solid revenue share within the gaming-console semiconductor products market, we expect AMD's revenues and EBITDA will strengthen over our 2017 forecast horizon, with a return to low-single-digit revenue growth and EBITDA margins," said S&P Global Ratings credit analyst John D. Moore.

S&P Global Ratings also expects free cash flow will remain weak at about break-even to negative $50 million annually in 2016 and 2017, including payments related to AMD's recently amended five-year wafer-supply agreement with Globalfoundries Inc. (GF). AMD agreed to pay GF $100 million in four quarterly installments beginning in the December 2016 quarter. Once completed, the current recapitalization transaction should reduce interest expense by about $60 million annually, partially offsetting the GF installment payment cash outflows in 2017. AMD expects to generate free cash flow for the year ending Dec. 31, 2016.

The stable rating outlook reflects AMD's moderating weakness and improving prospects to stabilize its operating performance. It also considers AMD's vulnerable business profile. Ongoing competitive pressures could reverse its recent improvement in the weak PC microprocessor market as well as new product markets.

Although unlikely over 2016 and 2017, we could lower the rating if AMD's liquidity weakens such that its cash balances decline to less than $600 million, or if its business declines persist further, impairing its liquidity position.

We could raise the rating if AMD achieves sustained revenue and margin growth and preserves its liquidity.

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