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.


Chuckula said...

Good report. This tends to exemplify the problem that AMD has.. it wants to build large, expensive CPUs (like the K10, R600, or the upcoming Fusion) but its manufacturing is not able to actually make those designs in any profitable way.
Right now AMD's only production chip is the several year old Athlon64, and that has been forced to such a low price point that AMD cannot make any money off it either.
If AMD has a shot, it is to get a chip that is simple enough to produce cheaply and one that has enough performance to at least compete with Intel's mid-range. AMD can give up on 1. performance crowns and 2. massive increases in marketshare. Instead, if it can get a decent and inexpensive processor out the door and also keep its manufacturing costs under control, it can probably survive long enough to actually develop the next-generation parts.

The main problem is.. can AMD actually do any of the above? The dual-core version of the K10 might be small enough to cheaply mass produce, although the stories about AMD's 65nm process are sounding like a horror movie right now (see the Inquirer if you trust it). It's just like the nightmare Intel went through at 90nm except AMD is already deeply in debt and has no quick path to 45nm.

As for TSMC, that out-sourcing deal won't even be a possibility until at least late 2008, don't expect AMD's next generation of high performance chips to come from the foundries (unless AMD really messes up).

SPARKS said...

I thought, last week, AMD said the price war was over. Well think again. They are trying to retain market share so badly, they're going to sacrifice their highest margin chips, servers, right on time for Penryn's launch.




13ringinheat said...

If only manufacturing processors was as easy as making slide shows AMD would be doing great.

Perhaps they will go bankrupt as a CPU company only to reemerge as a professional slideshow making company for corporate presentations.

Anonymous said...

Not sure if it is the beginning of the end... but I think this is a statement that Hector's 'market share at any and all cost' strategy is not going to be tolerated by the financial community anymore. If Hector continues this strategy he is going to have to go it alone...

Hector forgets he has a duty to the owners (shareholders) of the company as well, his big ego I think is getting in the way of making good strategic decisions.

It would have been interesting to see what would have happened if AMD had ceded some market share over the last 6-9 months by not cutting prices to the bone and perhaps remaining at or near the black. This would have allowed them to get the manufacturing capacity in place for K10 which is what they really need. Now they have less capacity than they could have had, more market share (yet lower profitability) and no ability to go back to the financial market for more money. They also have set a very low price bar, which if K10 doesn't wildly exceed L8 performance, they will have to live with the pricing precedent they have set with K8.

They have penetrated the major OEM', established some credibility, and have a foothold so I'm not sure what an extra 3-5% market share gets them in the short term (other than debt). If K10 is good they would have been able to win the share back in 2008...if it is bad then things would have been no different than they are not.

Hector should be removed.

SPARKS said...

Well, it seems even the EU has an agenda on behalf of AMD. It seems the “Scrappy Little Company” needs all the help they can get at this juncture, and they’re getting it from everywhere. With the current performance/price ratio at its historical best, compounded by an excellent exchange rate, you would think the EU would STFU and enjoy the ride.

It escapes me why they are compelled to levy these charges against INTC. “Wrector Ruinz must have friends in the EU. After all, they just “granted” him 361 million to keep FAB 30 solvent. The EU suing Americans companies on behalf of American companies? Maybe we should sue them, on behalf of American families, for all the Americans buried there from the last two world wars. Perhaps for the trillions protecting them during the cold war from Soviet aggression

One thing’s for sure, AMD will take it any way they can get it. Indeed, desperate times make for strange bedfellows.



SPARKS said...

Hey Doc. Look at the TDP's of these bad boys! Holy macaroni! Can you or any of the other chip gurus out there calculate the TDP @ 3.0 gHz using these numbers? These things Make my 955EE Presler look energy efficient!


Roborat, Ph. D. said...

It escapes me why they are compelled to levy these charges against INTC. “Wrector Ruinz must have friends in the EU. After all, they just “granted” him 361 million to keep FAB 30 solvent.

I wouldn't go as far as saying that the EU favours AMD over Intel. I'm quite sure Intel has more investmenst and tax fees towards countries in the EU as a whole compared to AMD.

I just think the EU loves suing big American corporations for the sake of suing and not really improving anything. Take the Microsoft case for instance. Lots of fines while only asking Microsoft to remove pre-installed media players. Great, now grandma needs to log into the internet to download the player herself!

Roborat, Ph. D. said...

Hey Doc. Look at the TDP's of these bad boys! Holy macaroni! Can you or any of the other chip gurus out there calculate the TDP @ 3.0 gHz using these numbers? These things Make my 955EE Presler look energy efficient!

i don't think its possible for AMD to get to 3Ghz Quadcore using 65nm. Barcelona needs to wait for 45nm. You also need to consider that Barcelona doesn't need to reach 3.0Ghz in order to be very competetive. I'm still waiting for a complete benchmark in order to be certain if the performance they offer justifies the TDP ratings.

SPARKS said...

Doc, AMD 'says' they've got one running @ 3.0 gHz. Check the photo closely there's a 1200w PS sitting on top to run this triple x2900xt furnace/powerhog! They are gonna need it! What happened to efficiency? Not on this thing.



Anonymous said...

Chuckula said:
"It's just like the nightmare Intel went through at 90nm"

Why do people keep spouting this crap - provide a SINGLE piece of data that the 90nm process was bad. The issue was with THE P4 ARCHITECTURE!

Anonymous said...

Doc, AMD 'says' they've got one running @ 3.0 gHz. Check the photo closely there's a 1200w PS sitting on top to run this triple x2900xt...

Like AMD says it's all about watt per performance! Oh, it's performance per watt? Oops. Next thing you know so will be doing a price/platformance comparison and conveniently forget to include the cost of the mini power plant sitting in the computer.

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