Fitch Rates Advanced Micro Devices' $2.5B Term Loan 'BB-/RR2'; Outlook to Positive.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has assigned a 'BB-/RR2' rating to Advanced Micro Devices Inc.'s (AMD (Advanced Micro Devices, Inc., Sunnyvale, CA, www.amd.com) A major manufacturer of semiconductor devices including x86-compatible CPUs, embedded processors, flash memories, programmable logic devices and networking chips. ) $2.5 billion senior secured Term Loan B due 2013, and revised AMD's Rating Outlook to Positive from Negative. The Term Loan B is expected to close the week of Oct. 23, 2006, in conjunction with AMD's consummating its acquisition of ATI Technologies (ATYT ATYT ATI Technologies, Inc (stock symbol) ). Fitch has also affirmed the company's Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) at 'B' and upgraded the rating on AMD's $390 million of 7.75% senior notes due 2012 to 'BB-/RR2' from 'B/RR4' due to the indenture providing for these notes to be equally and ratably secured with the Term Loan. The existing 'BB/RR1' ratings on AMD's $100 million senior secured bank revolving line of credit Revolving line of credit A bank line of credit on which the customer pays a commitment fee and can take and repay funds at will. Normally a revolving LOC involves a firm commitment from the bank for a period of several years. is withdrawn due to the company's cancellation of this facility. The ratings actions affect approximately $2.9 billion of total debt, although this amount excludes the imminent drawdown Drawdown The peak to trough decline during a specific record period of an investment or fund. It is usually quoted as the percentage between the peak to the trough. Notes: on AMD's Eur700 million (approximately US$890 million) Fab 36 Term Loan due 2011. The ratings and Rating Outlook reflect Fitch's belief that AMD's: * Operating environment will be challenging over the near term, but the company's operating performance will be stronger and less volatile than it was historically; * Strong product technology roadmap, resulting in record-level unit shipments and revenues over the past few years, which should enable the company to at least sustain an approximately 20% share of the microprocessor (MPU See microprocessor. ) market; * Imminent acquisition of ATI Technologies (ATYT), which will provide AMD with the capabilities necessary to offer platform products in the intermediate term, as well as additional revenue growth opportunities resulting from ATYT's relatively small but rapidly growing exposure to consumer markets (gaming, digital televisions, and cell phones); * Strengthened relationships with original equipment manufacturers (OEM (Original Equipment Manufacturer) The rebranding of equipment and selling it. The term initially referred to the company that made the products (the "original" manufacturer), but eventually became widely used to refer to the organization that buys the products and ), including Dell Inc. (Dell; rated 'A,' on Rating Watch Negative, by Fitch), supporting the case for more consistent operating results going forward. Ratings concerns center on: * Intel Corp.'s (Intel) refreshed product line-up, which is anticipated to stem or even modestly reverse market share lost to AMD over the past few years; * Intel's ongoing meaningful manufacturing technology advantage over AMD, driven by consistent and significant historical capital expenditures, forcing AMD to aggressively upgrade manufacturing facilities; * Significant capacity additions by both Intel and AMD in the near term, likely resulting in excess capacity and pressuring average selling prices (ASP) and gross margins; * AMD's limited financial flexibility due to significant spending requirements on capital equipment, research and development (R&D) investments, and marketing initiatives; * Less robust personal computer (PC) demand growth anticipated for 2007-2009. Fitch believes positive rating actions could result from AMD's: * Successful integration of ATYT; * Maintenance of at least 20% share of the MPU market; * Realization of expected significant volume upside from Dell and other recent OEM wins that would enable AMD to maintain sufficiently high utilization rates as it ramps additional capacity; * Successful sale of its remaining 38% ownership interest in Spansion Inc. (Spansion; rated 'B-', with a Negative Rating Outlook), the proceeds from which are required by the Credit Agreement to be used to reduce the Term Loan B balances. The recommended Recovery Ratings reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario, given Fitch's estimates that AMD's reorganization value of $4.0 billion is significantly higher than its projected liquidation value Liquidation value Net amount that could be realized by selling the assets of a firm after paying the debt. of $1.4 billion. In estimating reorganization, Fitch assumes a 5 times (x) multiple and 50% stress to AMD's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become for the latest 12 months (LTM LTM abbr. long-term memory ) ended Oct. 1, 2006 of approximately $1.6 billion (pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma for the ATYT acquisition). Fitch believes a 50% discount to EBITDA is more appropriate than the 80% stress applied historically, reflecting AMD's increased market share, diversifying customer and product portfolio, expanding addressable market, and Fitch's expectation that future MPU market recessions are likely to be less severe than in the past. Fitch arrived at an adjusted reorganization value of $3.4 billion after reductions for administrative and cooperative claims. Based upon these assumptions, the senior secured debt, including the $2.5 billion Term Loan B and equally and ratably secured $390 million of 7.75% notes due 2012, recover 86%, resulting in 'RR2' ratings for both tranches of debt. Despite meaningfully improved profitability over the past few years (after adjusting for Spansion spin-off and resultant deconsolidation), Fitch believes the company will continue to be challenged to generate any free cash flow in the intermediate term due to aggressive capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. , which is expected to peak at approximately $2.5 billion for 2007. While AMD could reduce capital spending in reaction to market conditions, Fitch believes this is not likely, recognizing the company's need to expand its nearly fully utilized existing capacity to reduce per unit costs and provide for the aforementioned anticipated volume increases. As a result, Fitch believes AMD will be challenged to meaningfully reduce debt levels with free cash flow over the near-term, although opportunities exist for debt reduction via asset sales. Further limiting debt reduction opportunities is AMD's deepening relationships with global OEMs, which Fitch suspects will necessitate the company maintaining higher than historical cash balances. Pro forma for the ATYT acquisition, liquidity is sufficient and solely supported by approximately $2.4 billion of cash and equivalents. However, additional sources of liquidity include the aforementioned Fab 36 Term Loan due 2011, which AMD will use to purchase equipment for Fab 36, and AMD's anticipated sale during 2007 of its remaining interest in Spansion. Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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