AMD's Credit Rating - Is This The Beginning Of The End?

“A major corporate credit evaluation firm today reaffirmed its B-negative rating on Advanced Micro Devices Inc. and warned that the company's debt-rating could be lowered early in 2008 if the semiconductor manufacturer failed to reverse the challenges it currently faces and improve upon its cash flow. A negative credit rating means AMD would have to pay a premium to attract buyers of its corporate bond and further sink the company into debt.“

The banks are getting impatient. There is significance in the timing of this announcement just two days before AMD’s analyst meeting and should be considered a shot across AMD’s bow. AMD needs to announce concrete plans to return to profitability. The statement from S&P’s Rating Services further confirms what we have been talking about in this blog. The first one is about the early signs of impending bankruptcy discussed in this post, which is the erosion of support from the investment community. This is the first clear sign that AMD will soon begin to have difficulties raising cash with reasonable terms.

The second one is about how AMD’s failed expansion led to its current financial deficit. At the heart of this problem are two Fab’s which were initially planned to generate revenues of up to $1500M per quarter to stay afloat. At the moment the shortfall just for the Computing Solutions Group is $321M/qtr. The ATI business is costing AMD another $40M/qtr. There is nothing on the horizon that can allow AMD to generate enough revenue and this is what is making everyone nervous.

"Standard & Poor's Rating Services said in a statement today that it believed AMD's management had not effectively executed the company's turnaround plans and that the company continues to face strong competitive pressures from market leader Intel Corp. even as its cash position remains challenged.

AMD's recently disclosed plan to reduce capital expenditure, explore manufacturing as well as technology process development partnerships and sell some assets could help improve its cash position, according to S&P analyst Bruce Hyman. Even these plans cannot guarantee the company's successful turnabout in a weakening and competitive market, the analyst warned.

"The negative outlook reflects the significant challenges AMD faces in restoring profitability from currently depressed levels, and stabilizing cash flows despite a continued technology lag," Hyman said in the report. "A positive outlook would require reversal of current trends and demonstration that recovery could be sustained.'

S&P said it cut AMD's credit rating on the company's 7.75 percent senior notes due 2012 to B-minus from BB following the release of the "collateral securing" the debt.
The ratings agency noted that AMD's ability to cope with its financial position was eroded partly by its purchase last year of ATI Technologies, an acquisition the company funded in part by paying cash.

AMD "generated about $600 million negative free cash flows in the June quarter, and over $2 billion negative free cash flows in the past four quarters," according to Hyman. "Cash balances stood at $1.6 billion on June 30, 2007. Debt was $5.8 billion. Leverage will rise very substantially in September."

Definitely a very grim assessment of AMD’s position. A negative cash flow of $2B a year is massive and very alarming considering that in 6 months time AMD needs to start purchasing 45nm tools. The rumours about the use of TSMC for 45nm CPU manufacturing doesn’t really sound implausible considering the lack of options AMD has when it comes to spending for the next process transition.

AMD may have gotten away last quarter by throwing around the “asset-lite” buzzword just to ward off investor jitters. But after another quarter of abysmal performance, the time for talk is over. They better have something substantial to announce tomorrow or they’ll find Loan Sharks Inc., to be the only willing creditor in town. I heard that their debt collecting process is known for its ruthless efficiency.